Follow the (Bond) Money
Two months ago, the consensus was that long bond futures had formed a major top around 114. As we all know, the consensus is rarely right for very long.
One of the indicators that could have tipped traders off to this last leg higher was the interaction between commercial hedgers and small speculators in long bond futures. In a relatively rare move, commercial traders were net long the bond futures throughout April, while small speculators were net short. Basically, this means the "big boys" were looking for bonds to rise in price (decrease in yield) while the "dumb money" was shorting bonds, assuming a major top was in place.
The chart below shows the combination of commercial vs. small spec positions -- if the variance (the tan area) is above zero, then commercials are net long and/or small specs are net short. While not perfect, especially on the sell-side, this information would have tipped you off to every major rally in bonds for the past three years, including the most recent one. Currently, the variance is back below zero, but is not particularly extreme. This, taken in a vacuum, suggests that while it is not necessarily a good time to buy bonds (for price appreciation purposes), it may be too early to short.
NOTE: Bond "price" in this chart is simply the yield subtracted from 100.
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