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Treasury Curve Collapse Spurs Showdown Between Fast, Real Money

(Bloomberg) -- A tussle seems to be ensuing in the Treasuries market, with real-money and fast-money accounts locking horns over the direction of the yield curve. Real-money players seem to be winning the battle, at least for now, as the curve continues its relentless flattening.

Positioning data and market flows suggest the bulk of recent demand for bets the Treasuries curve will continue flattening come from real-money accounts, which are continuing to favor the yield pick-up of Treasuries over counterparts from Germany and the U.K.

At the same time, the pace of the flattening has subsequently lured fast money to enter tactical steepener plays that would gain should the curve snap higher.

See here for more on the dilemma facing Fed officials as the curve flattens

CFTC positioning data show the increasing divergence of positioning in the long end of the Treasuries curve between asset managers, or “real money, ” and speculators, known as “fast money.” Real money has increased bullish long-end bets as 30-year yields cheapen above 3 percent, while fast money has done the opposite by adding to the long-end short base in a wager on a steeper yield curve.

At the same time, long-end duration appetite from real money accounts can be seen in 10-year Treasury futures, with asset managers maintaining net longs at record highs last week.

Recent flows in futures, options and cash Treasury markets support the perception of the showdown between real and fast money.

Large futures blocks are appearing at a more frequent rate, with the latest trade du jour being a bet that the two-year/10-year curve will flatten more. Early Wednesday, a huge $1.5 million ultra-long block was purchased. For the second day in a row, a put option on the 30-year Treasuries futures contract was heavily sold (almost $35 million premium), in a sign of confidence that long-end yields won’t rise much. In the cash space, Monday saw consistent real-money demand for the 30-year cash bond around a yield of 3.05%.

On the other hand, Tuesday flows included fast-money steepeners and selling of 10-year spreads, which came under pressure as the curve flattened, Citi reported in a note.

While real-money investors appear to have the upper hand at the moment, fast-money accounts are sure to be maneuvering for a lucrative entry point to bet that the curve will steepen off its exceedingly flat levels. Still, next week brings two-year, five-year and seven-year Treasury note auctions that could pressure the curve, so perhaps remaining on the sidelines may be the safest play for now.

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