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Minyan Mailbag - Treasuries COT

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

John,

According to the most recent Commitment of Traders report commercials are historically long the 10-year, thus expecting lower rates. In addition to this, open interest has soared recently.

What are the implications of this for volatility in the bond market? Will they add to their positions, or bail?

In my experience, commericals are "right" about 75% of the time and are deservedly called the smart money, but the extremes of their long position and the large open interest are notable here especially in light of what has been happening in the bond market over the past few days.

Thanks,
Minyan Ed

Ed,

I am bullish on volatility on both bonds and stocks.

We have seen a slight upturn in stock volatility. This is natural given rising rates. In an attempt to extract liquidity from the system, mainly because they are being forced to by the markets, the Fed by raising short term rates increases volatility. Remember one of my comments: liquidity equals low volatility. The less liquid a stock or any asset, normally the more volatile it is.

But the long bond has been less volatile than short paper. I believe this is because the Fed is monetizing: as they raise short term rates, they still create dollars, but buy long bonds with it (or synthetically through swaps the equivalent effect). If the long bond becomes volatile as a result of this failing, things will get much more volatile for stocks as well.

A precursor for this is a renewed and accelerated drop in the dollar, especially against the yen.

The huge worldwide injection of liquidity for the last few years has reduced volatility. Any attempt to unwind that will increase it.

Regards,
Prof. Succo

No positions in stocks mentioned.

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