This may come as a shock with 10-year rates near multi-year lows this morning , but the “smart money” commercial traders are positioned for a further decline in rates. In the chart below we show the net number of options and futures contracts held by commercial traders (blue line, right axis) – who are termed the “smart money” because they happen to be right more often than not especially at important turning points – overlaid on the 10-year treasury bond yield (red line, left axis). The commercial traders are long the largest number of contracts since last November. Typically long positioning of this magnitude has resulted in a rally in bond prices (i.e. a drop in yields) that is sustained until the commercial traders’ positioning becomes neutral or short.
Furthermore, we should also not forget that US 10-year rates are still rich versus most other sovereign 10-year issues. Chart 2 shows that the spread in 10-year rates between the US and Germany, France and Japan remains at a rather elevated level.