On several occasions, I have written about an extreme being hit in the weekly COTR (CFTC Commitment of Traders Report). I won't go into the workings of the COT Report, but you can see this article (Why I Watch the COT Report) if you want a little background. Today, I am watching the 30-year Treasury market.
The latest COT report came out last Friday, 10/2/20, and we learned that large speculators (hedge funds) have hit a record net short position. The chart below shows the COT positioning for the past 52 weeks (red bars are commercials and blue bars are large specs):
courtesy of Software North, 10/2/20
The chart below shows the net Large Spec position going back to 1994:
courtesy of SentimenTrader, 10/2/20
Will this be meaningful? That is unknowable. But since history often rhymes, I would expect to see the bond market trade higher (rates lower) as the smart money hedgers tend to be right more times than not.
Looking at this 20-year weekly chart of the US 30-year Treasury Bond (USB), you can see that (as of mid-day October 7, 2020) the USB is sitting right on its 40-week moving average (equivalent to the 200-day moving average):
courtesy of StockCharts.com 10/8/20
The 200-DMA tends to be a demarcation line for bull/bear markets. Should USB break lower, then odds are it will continue to trade lower for a while. But I would argue that, with the massive net short position in the hedge fund community, odds favor USB finding support around this level and moving higher. If it does so, then long-term interest rates will continue their march lower. Time will tell, but it's worth keeping an eye on since interest rates are a key driver across most other asset classes.
Please send any questions or comments to me at ttaschler@sprottglobal.com.
Tim Taschler, CMT
Sprott USA
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