The bullish action in the treasury bond market continued today with the 10-year yield down another 9bps and the 30-year yield down another 6bps. Bond yields are at levels not seen since the commencing of the "taper tantrum" in the middle of 2013. Even so, trader positioning suggests this rally in bonds could continue awhile longer.
The first chart below shows the net number of commercial trader options and futures contracts (long contracts minus short contracts) on the 10-year treasury bond (right axis, blue line) overlaid on the 10-year treasury bond yield (left axis, red line). The commercial traders are sometimes regarded as the "smart money" because rates tend to fall when the commercials carry extreme long positions and they tend to rise when the commercials carry extreme short positions. Currently the commercials are long nearly 300,000 contracts, which relative to the last six years is a large long position.
The second chart below shows the net number of non-commercial or "speculator" options and futures contracts on the 10-year treasury bond. Notice in this chart the right axis showing the net contract positioning of speculators is inverted because rates tend to fall when speculators carry extreme short positions and rise when speculators carry extreme long positions. Currently the commercials are short nearly 300,000 contracts, which relative to the last six years is a large short position.
It appears, given this trader positioning data, that speculators have been fighting this rally in bonds all year. It's true that speculators have reduced their net short position from more than 400,000 contracts to just under 300,000 contracts, but rates haven't tended to rise on a sustained basis until the speculators reach a net long position. All this is to suggest that speculators, who must be feeling the pain of being short, could start to cover their positions en mass, sending yields lower in a hurry.