Speculators in US Treasury futures have a poor timing record and last week went long, suggesting a rebound in yields.
The chart aggregates the positions of “non-commercial” investors in four Treasury futures contracts using duration-based weights. Examples of recent poor timing include: 1) a large long position in October 2010 – yields subsequently surged; 2) a large short position in early 2011 – yields subsequently collapsed; and 3) another large short position in March this year ahead of the recent yield decline.
The poor record reflects trend-following behaviour – more precisely, a tendency to invest in trends when they are at a late stage. Speculators are occasionally “bailed out” by events that cause an established trend to extend – a long position adopted in the second half of 2007, for example, benefited from the unfolding financial crisis. Such events, however, need to surprise – current Eurozone woes, presumably, are well-discounted.
Another possible contrarian signal is the swelling consensus that the US bond market is “turning Japanese”, i.e. low nominal yields reflect deflationary excess private saving. Current negative real yields, however, have no parallel in recent Japanese experience and are more plausibly the product of “financial repression” – Federal Reserve imposition of zero interest rates and effective deficit monetisation.