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29 Jun 2015
Positioning at the back end of the USD curve is increasingly long - BAML
FXStreet (Barcelona) - The Research Team at BofA-Merrill Lynch note that asset managers continued to build up longs at the back end, and further add that despite increased risks to global growth stretched positioning suggests risk to rates could be skewed toward a selloff.
Key Quotes
"We previously observed asset managers were loading up on USD curve flatteners, which was evident from increasing shorts in the front end and longs in the back end. Over the lastmonth, asset managers' positions in the front end, measured by net positions in Eurodollar (ED) futures, have stabilized, likely due to a more dovish Fed communication, although they remain at historically short levels. But long positions at the back end of the curve, measured by net longs in US and WN futures, have continued to increase despite the recent market selloff. The recent steepening of interest rates skew also points to increasingly long positions at the back end of the curve."
"Although there are fundamental reasons for this, including downside risks to the neutral rate as well as increasing risks to global growth, positioning at the back end of the curve could already be stretched."
"As a result, we believe any positive news on growth has the potential to trigger a continuation of the recent market selloff led by the back end. This is supported by our historical analysis,which demonstrates that a steeper skew and the build-up of asset managers' positions in curve flatteners tended to project higher rates over the following month. In fact, the market sold off in 70% of months following a steeper rates skew and the build-up of curve flattener positions, which has been happening recently."
"Developments around Greece have sharply deteriorated by the time of writing, which points to a market rally by next week. We would take this as an opportunity to establish shorts with a limited downside. In particular, we believe investors may consider buying 3m30y payer spreads."
Key Quotes
"We previously observed asset managers were loading up on USD curve flatteners, which was evident from increasing shorts in the front end and longs in the back end. Over the lastmonth, asset managers' positions in the front end, measured by net positions in Eurodollar (ED) futures, have stabilized, likely due to a more dovish Fed communication, although they remain at historically short levels. But long positions at the back end of the curve, measured by net longs in US and WN futures, have continued to increase despite the recent market selloff. The recent steepening of interest rates skew also points to increasingly long positions at the back end of the curve."
"Although there are fundamental reasons for this, including downside risks to the neutral rate as well as increasing risks to global growth, positioning at the back end of the curve could already be stretched."
"As a result, we believe any positive news on growth has the potential to trigger a continuation of the recent market selloff led by the back end. This is supported by our historical analysis,which demonstrates that a steeper skew and the build-up of asset managers' positions in curve flatteners tended to project higher rates over the following month. In fact, the market sold off in 70% of months following a steeper rates skew and the build-up of curve flattener positions, which has been happening recently."
"Developments around Greece have sharply deteriorated by the time of writing, which points to a market rally by next week. We would take this as an opportunity to establish shorts with a limited downside. In particular, we believe investors may consider buying 3m30y payer spreads."