Epic Long-Bond Short Squeeze Hits as Treasury Bears Seek Cover

(Bloomberg) -- The rally in Treasuries went into overdrive Tuesday, threatening to upend the legion of investors who are betting against longer-maturity bonds.

Thirty-year futures rose as much as 2 15/32 and outperformed on the curve, sending yields plunging as much as 12 basis points. Open interest in the contract dropped for a fourth day Monday, suggesting traders who had taken bearish directional bets were already feeling the jitters before the latest plunge in stocks.

Epic Long-Bond Short Squeeze Hits as Treasury Bears Seek Cover

Another drop in outstanding positions in data released after the close will confirm a full-blown squeeze is underway. Open positions in 20- to 30-year futures saw a combined reduction of $7 million per basis point on Monday, a measure of interest-rate risk exposure being pared. The cut in positions, equivalent to just over $8 billion of 10-year cash bonds, may just be a start of what’s in play.

Prior to the latest rally in Treasuries, speculative net-short positioning was growing, according to data from the Commodity Futures Trading Commission. Investors had more than 280,000 short contracts on 30-year futures as of Nov. 27, an increase of about 30,000 from a month earlier.

Tuesday’s equity plunge and clear shift out of cyclical and into defensive shares may indicate that the rally in bonds has further to run. A strong seasonality in the five- to 30-year Treasury spread in December -- which has contracted nine times in the past decade, also suggests the long-end has further scope to outperform.

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