CoT: Peeking Into The Future Via Futures, Hedge Fund Buying

Following futures positions of non-commercials are as of March 9, 2021.

10-year note: Currently net short 46.1k, down 49.5k.

The FOMC meets next week. This is the year’s second meeting. Six more remain – the scheduled ones, that is.

A lot has happened since the last meeting, particularly on the yields front. Rates on the long end of the treasury yield curve have firmed up. When the last meeting ended on January 27, the 10-year yielded 1.01 percent, having broken out of one percent early that month. This week, these notes closed out Friday yielding 1.64 percent – a 13-month high.

Markets are not liking this and hoping that the Fed would do something to arrest the uptrend. Speaking at a public event on the 4th this month, Chair Jerome Powell refused to acquiesce to markets’ increasing optimism for some version of Operation Twist, in which the Fed sells short-term notes and buys long-term notes and bonds. The central bank has been spending up to $120 billion/month in purchases of mortgage-backed securities and treasury notes and bonds.

So, at the end of next week’s meeting on Wednesday, markets will be on pins and needles as to if the Fed announces something to cap rates on the long end. The meeting is also taking place at a time when banks are clamoring for SLR (supplementary leverage ratio) extension.

Last April – post-Covid – US regulators eased SLR requirements, which were put in place in the wake of the great financial crisis. Banks were required to have equity capital equal to three to five percent of their assets back then. Last year’s exemption allowed them to exclude US treasuries and cash kept in reserve at the Fed from their assets when calculating the ratio.

If the exemption is not extended, banks likely will try to reduce their treasury holdings. Alternatively, it is very possible that, sensing that the regulators were not going to extend the exemption, banks are already liquidating at least some of their holdings, putting upward pressure on the rates.

We are likely to find out next week the fate of this exemption.

30-year bond: Currently net short 178.8k, down 11.5k.

Major economic releases for next week are as follows.

Monday brings Treasury International Capital data (January). In 2020, foreigners purchased $368.3 billion in US stocks – a new record – up from $504 million in 2019.

On Tuesday, retail sales (February), industrial production (February) and the NAHB Housing Market Index (March) will be published.

In the 12 months to January, retail sales jumped 7.4 percent to a seasonally adjusted annual rate of $568.2 billion – a new high.

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