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The Case For Bonds Ahead Of CPI

Writer's picture: Carnivore Aaron TradesCarnivore Aaron Trades

Updated: Jan 18

With CPI data ahead tomorrow, are bond shorts positioned for a massive pie in the face? Let's look at the bull case in the near to medium term. With the recent concerns of stickier inflation as well as political and fiscal recklessness, the long end of the yield curve has surged well over 100bps since the Federal Reserve decided to cut rates last Fall. In fact prior to just recently there has NEVER been an instance in history where the 10 year yield rallied 25% or more in the first 100 days since a Fed cut. However from September 16th, 2024 to December 23rd, 2024 the 10YY rallied exactly that much in exactly 98 days - an incredible 27.7% move in terms of an investment basis. The only other occurrence that comes close was in 1981 where the yield rallied 100bps in 3 months however percentage wise, 100bps was much lower than 27% as the yield back then was roughly 12-13%.


The 10 year yield rallied 100 bps in exactly 98 days after the Fed rate cut.
100 basis point rally in 98 days.

Needless to say long term inflation concerns are elevated. Despite a weaker than expected PPI number today (-0.2% YoY and MoM) bonds have not seen any relief lately and are still reeling from Friday's hotter than expected non-farm payroll number which caused a bloodbath in bonds and stocks alike. Since late 2020 I have been firmly and unwaveringly in the stagflation camp and have frequently made the case for higher long end bonds moving forward, however in the near to medium term positioning appears to be extremely stretched and bond shorts may be offsides. Via the weekly COT reports we can see that since 2024 Large speculators (Blue) have been on the right side of the trade at every turn while retail (yellows) and commercials (red) have been often together on the wrong side. We can see that is how they are positioned currently.

COT reports show Hedge funds being on the right side this year.
COT positioning shows Hedge funds (blue) on the right side for 2024.

Typically commercials (banks, dealers) are the smart money to follow however there are often hedged in many ways and despite being net short futures they may actually be covertly long via TLT options positioning. We can see below that support was hit today at $85 for this Friday's expiry and will likely be supported moving forward.

TLT hit dealer support at $85 for the 1/17 expiry.
$85 dealer support level for the 1/17 expiry

After that there is an insignificant open interest on expirations between this Friday and February 21st so looking out to the 2/21 opex week we can see again 85 serves as a fairly large shelf with much of the market (retail, institutions) being long puts at or below that strike making banks (dealers) the other party that trade.

TLT gamma exposure for 2/21 expiry.
February opex also has supportive dealer positioning for TLT.

However while gamma exposure is a great tool, it does not always tell the fully story and many quantitative options analysts miss important details that our proprietary dealer tools (featured in our Live Trading Room) pick up. For instance, while these two GEX charts appear to be mostly supportive the support is actually quite understated. Not only is positioning supportive, but dealers appear to be aggressively exposed to the upside particularly after this Friday. Almost ZERO downside priced in between now and 2/21 with and the majority of the exposure being to the $90, $92, and $93 strikes.



TLT dealer exposure for 1/17 and 2/21/
TLT dealer exposure for 1/17 and 2/21

So, banks may be short futures contracts against a rather large bullish position to the long end using other means. Perhaps this could be a hedge to a core short in the futures market with the aim to make gains off of a relief rally. Certain technical conditions seem to support this claim. Looking at the 10 year futures (/ZN) we can see a trendline going all the way back to August 2022 that has served as a pivot point for the market.

Multi year trend line on the 10 year bond futures (/zn)
10 year bond trend line.

Taking a look at the 30 year yield, we are also approaching extreme levels of overbought on the weekly timeframe. Each of these instances has led to notable pullbacks or consolidation periods since the 2020 bottom.

30 year yield is extremely overbought.
Extreme overbought condition on the 30 year yield

In conclusion, with the market's sensitivity to inflation data already at a fever pitch, the odds of a sell the rumor, buy the news event seems likely for treasuries even if the initial reaction is to the downside. That said the 30 year yield may yet want to test double top so it is certainly a possibility to see a challenge of the old high should CPI come in hot, though I question the sustainability of such a move in the near term and think that risk in bonds is ultimately to the upside over the next month or so. 🔐For access to premium trading content including swing trade alerts & live day trading room visit 👉 - https://www.carnivoretrades.com/ 


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