A big short in Treasurys? Traders are building up bets around a debt ceiling resolution

Speculators have been building up a “historically massive” short position in U.S. Treasury futures ahead of what could be $1 trillion of new debt issuance on the heels of a debt-ceiling resolution, according to Macquarie’s sales and trading global macro strategy desk.

The buildup matters because much of Wall Street has been focused on the brief spike in yields on some Treasury bills due in early June to above 7%, or climbing U.S. sovereign CDS spreads as the U.S. teetered toward the brink of a default. Short bets are a wager that prices for a stock or bond will fall. Since bond prices and yields move in the opposite direction, fixed-income speculators would be focused on the potential for yields to climb when new Treasury supply outstrips demand.

“Markets are trying to get ahead of that as much a s possible,” said George Catrambone, head of fixed income and head of trading at DWS Group, in a phone interview Wednesday, adding that some investors are factoring in higher Treasury yields.Catrambone also said it’s hard to pin any single rationale to open futures contracts. He pointed to other “crosscurrents” at play in markets, including that Congress still has yet to do its part to increase the debt-ceiling.

They pointed out that the 10-year Treasury yield TMUBMUSD10Y climbed to about 3.8% in late May from about 3.4% over the past two weeks.

Source: Loan Digest (loandigest.net)

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