Short Bets Build in Treasuries Futures Causing Chaos for Bonds

(Bloomberg) -- After futures led another bruising selloff in Treasuries on Thursday, the evidence is mounting that a big short position is responsible.

Open interest in 10-year notes surged by almost 150,000 contracts, according to preliminary data, the equivalent of $14 billion in the cash bonds. Coupled with the price move, that suggests new short positions were added with overall open interest climbing to the highest in over a year.

Dovish comments from the Federal Reserve Wednesday had briefly stopped the rout in bond markets until a wave of selling -- just as the Asian trading session was giving way to Europe -- sent Treasury yields skywards on Thursday. The 10-year bond yield surged as much 11 basis points to 1.75%.

That’s a trend that has been prevalent all month, with the bulk of Treasuries weakness occurring outside of U.S. trading hours.

In aggregate across major bond markets, open interest remains well below pre-pandemic levels. It collapsed last March when a breakdown in liquidity caused an unwind of so-called basis trades -- an arbitrage between the cash market and futures -- and a slew of margin calls that led to a huge deleveraging of bond futures positions.

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