Government bond yields suddenly turned downward, and bond prices surged.
Goldman Sachs said: Bessent’s repo of Treasuries, on the surface a fiscal operation, may in fact be aimed at specifically taking care of those shorts.
CTAs’ bond long positions are now down to the lowest level in years, while shorts have piled up to a historic high. Once they try to push it further down, there’s already no more “inventory” to unload. If a two-standard-deviation rebound occurs, they would need to cover about $150 million in shorts within a month.
Covering itself will further push prices up and suppress yields. Goldman estimates the 10-year yield could fall straight from 4.6% to 4.3%.
With just over two months until the midterm election, as yields drop, mortgage and credit rates should follow down as well—voter sentiment will get a major boost. In the short term, this aligns temporarily with the interests of stock market bulls.
But repos can only be a short-term move. If it becomes the norm, the credibility of the Treasury Department and the U.S. dollar would both take a hit. We should separate how the market looks in the pre-election period from after the election, during September to November.
Historical data also serves as a reminder: from 1974 to now, September and October are already the most volatile months of the year, and midterm election years are even more intense. The low-volume days like those in August are almost over.
This is good for U.S. Treasuries and the stock market, but those shorting Treasuries may end up losing money....
Goldman Sachs said: Bessent’s repo of Treasuries, on the surface a fiscal operation, may in fact be aimed at specifically taking care of those shorts.
CTAs’ bond long positions are now down to the lowest level in years, while shorts have piled up to a historic high. Once they try to push it further down, there’s already no more “inventory” to unload. If a two-standard-deviation rebound occurs, they would need to cover about $150 million in shorts within a month.
Covering itself will further push prices up and suppress yields. Goldman estimates the 10-year yield could fall straight from 4.6% to 4.3%.
With just over two months until the midterm election, as yields drop, mortgage and credit rates should follow down as well—voter sentiment will get a major boost. In the short term, this aligns temporarily with the interests of stock market bulls.
But repos can only be a short-term move. If it becomes the norm, the credibility of the Treasury Department and the U.S. dollar would both take a hit. We should separate how the market looks in the pre-election period from after the election, during September to November.
Historical data also serves as a reminder: from 1974 to now, September and October are already the most volatile months of the year, and midterm election years are even more intense. The low-volume days like those in August are almost over.
This is good for U.S. Treasuries and the stock market, but those shorting Treasuries may end up losing money....