Treasury Rally Aided by Short Covering

As shown in the chart below, traders amassed the largest cumulative short position in 10-year Treasury contracts in history in late February 2017. To establish the short positions, traders borrowed Treasuries and sold them in the open market—essentially speculating that yields would rise and prices would fall, at which time they could profitably repurchase the securities.

Figure 1. The Decline in the 10-Year Treasury Was Likely Amplified by Short Covering

We track this statistic because it can be an informative indicator of technical pressures in the market. Though counterintuitive, we have argued over the past few months that the record number of bearish bets on the 10-year Treasury would likely exacerbate any decline in Treasury yields. The reason being that if yields fell (and prices rose), short positions would lose value and traders may then be forced to buy Treasuries to cover their short positions, thereby increasing demand for Treasuries and driving yields down further. This can lead to a feedback loop, where yields fall further, triggering more short covering, which pushes yields down further still, and so on.

Our belief in this possibility seems to have been proven true over the last few weeks, as the 10-year Treasury yield has fallen from a peak of 2.63% on March 13 to 2.22% a month later on April 13, 2017; and with that, short positions in intermediate to long-term Treasuries futures markets have normalized from historically high levels, though the level of shorts remains high in shorter-term maturities. Other factors surely played into the move in the 10-year Treasury: a general shift in investors’ portfolio allocations toward more conservative investments amid equity market volatility and geopolitical risks, for example. However, technical pressure due to positioning in the futures market was undoubtedly an exacerbating factor. While catalysts such as weaker economic data or geopolitical events always have the potential to push yields lower still, the normalization of short position levels on intermediate- and longer-term Treasuries may remove at least one factor that could lead to additional volatility.


Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

Selling short can result in losses should the borrowed security increase in price, rather than decline. The theoretical potential loss is unlimited. Additionally, short sales will incur interest on the borrowed shares while also being subject to margin calls, or early sales in the event that the original owner wishes to sell their position.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

Tracking # 1-6000058 (Exp. 4/18)