Jeffrey Gundlach left the mostly unchanged U.S. Treasury market with a warning heading into this past weekend: Everything could change soon.
In a tweet, DoubleLine Capital’s chief investment officer pointed to the latest data from the Commodity Futures Trading Commission. It showed hedge funds and other large speculators added to bets against 10-year Treasury futures, bringing their net short position to a record of 698,194 contracts. The group has also built an unprecedented short in ultra-long bond futures.
To Gundlach, this one-sided wager from speculators “could cause quite a squeeze.” That proclamation caused a stir, judging by the feedback on Twitter and the amount of Bloomberg readership. Bond bulls have to be feeling as if they have the wind at their backs. Also last week, another prominent West Coast chief investment officer, Scott Minerd of Guggenheim Partners, tweeted that investors would be wise to reduce risk ahead of impending instability.
Before loading up on Treasuries, however, I’d advise looking at what Gundlach had to say about futures positioning just three months ago.
“This is kind of mind-blowing that we can’t get a rally off of this type of speculative short in the Treasury bond market,” Gundlach, DoubleLine’s chief investment officer, said in a webcast. “You almost always get a rally,” he said, “but now we’re just going sideways. So for the bulls of the world, this is not really all that corroborative.”
At that time, I wrote that a looming big short squeeze was no sure thing, for a number of reasons. And, indeed, the benchmark 10-year Treasury yield has remained largely between 2.8 percent and 3 percent for almost three months. If anything, the fact that it’s now 2.83 percent, toward the lower end of the tight range, justifies speculators adding to short positions.
Gundlach, remember, has warned that the combination of rising U.S. interest rates and fiscal deficits is like a “suicide mission,” or a “pretty dangerous cocktail” at the very least. Those trends remain firmly in place: Earlier this month, the Treasury Department auctioned a record $26 billion of 10-year notes. Meanwhile, bond traders are signaling that they expect the Federal Reserve to look past some of the recent emerging-markets turmoil and raise interest rates twice more by the end of the year.
The last part about the Fed is the most important — and probably the only path to a huge short squeeze. If the minutes of the central bank’s latest meeting, to be released on Wednesday, turn out to be much more dovish than the market anticipates, then Treasuries could rally sharply as traders reprice rate hikes. The same risk exists for Chairman Jerome Powell’s comments in Jackson Hole, Wyoming, on Friday.
Neither of those scenarios seems likely. The U.S. unemployment rate is below 4 percent and inflation is above the central bank’s 2 percent target. The Fed is meeting its mandate, and that means short-term rates will continue to rise. And with two-year Treasuries yielding 2.6 percent, there’s just not at lot of room for 10-year yields to tumble much further, unless investors think the yield curve will invert swiftly.
Speculators have proved throughout the year that it’ll take a lot to shake them out. So while Gundlach’s talk of a squeeze might be exciting for a market lacking significant swings lately, the sobering reality is the massive short position in Treasuries is probably here to stay awhile longer.