COT Blue: Biggest Warning Yet

The problem, or one of them anyway, with so many glaring market warnings is that it becomes difficult to keep up with all of them. You tend to focus on those right in front of you, the more immediate and visible. Oil is everything for reflation, and therefore its untimely end, so naturally the WTI curve gets all the unlovable love.

And while we pay a lot of attention to the yield curve, there is less emphasis on some of the mechanics behind it. The Treasury futures market sort of runs the place, but it isn’t always a straightforward process from which to drive analysis.

What we do know is that December has been a total disaster. In the stock market, of all places, the S&P 500 entered the month on an upswing. The initial liquidation that began like WTI after October 3 by the last stretches of November seemed to be under control. The index had rallied back almost to 2800 by December 3.

It’s now down almost 10% in just a few weeks, more importantly setting a new low for the year (lower lows). While that has surprised many, the Treasury futures market issued up what might have been the biggest warning yet the last week in November.

One of the odd aspects of UST futures is the futures contracts themselves. I don’t mean their technical specs, rather how they are sometimes used. I wrote near the start of this year about the curious interest over open interest.

Compared to a lot that goes on in these kinds of markets, especially where derivatives like these are concerned, this one’s pretty simple and intuitive. Open interest goes up when markets aren’t very sure about what’s in the future. Since UST’s are the settlement product for a variety of shadow trades, especially derivative FX, what’s being hedged here isn’t really UST yields or the US government’s credit risk.

Treasury futures are a sort of catchall for general, nonspecific uncertainty. The more this one market gets busy the more we have to be on the lookout for bad stuff. When open interest skyrockets, really bad stuff.

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