James Carville, advisor to then president Bill Clinton, famously said that he wanted to be reincarnated as the bond market so that he could intimidate everybody – that’s because the bond market is usually right.
So what is happening with the bond market?
Large speculators are in a crowded short
The CFTC's Commitment of Traders report shows that large speculators (read: hedge funds) are either in crowded short or near crowded short positions in the 10-year and the long bond. The chart below shows the net position of large speculators in the long T-Bond futures contract. Readings were in a crowded short and there has been some minor short covering.
Coincidentally, long bond yields have fallen through a support line and bond prices have begun to rally.
In the 10-year, large speculators remain in a crowded short.
…and yields are sitting right at technical support.
These sentiment readings are evocative of a stretched rubber band ready to snap back. You don’t often see crowded long or crowded short positions in futures contracts. The dual crowded short readings in both the 10-year and long bond are even more rare and confirm my belief that the bond market is poised for a tactical rally.