Halister News

(Bloomberg) -- A “relentless bid for bonds in NY trading hours” over the last month is surprising in light of gains for U.S. stocks and normal-size moves in USD/JPY and EUR/USD during same hours, BofA strategists Shyam Rajan and Carol Zhang say in note; it appears to be explained by a drop in volatility.

• Theory that “a move lower in volatility is driving leveraged buyers of duration” is supported by large increases in open interest in Bond contract in episodes since 2013 when rates declined while stocks rose, and by leveraged funds adding duration in the bigger rallies
• “This raises the possibility that a decline in volatility is driving buying from funds that increase exposure based on relative volatility amongst asset classes or the ones that find vol-adjusted carry much more attractive”
• During past two weeks, a large drop in vol was “met with the largest flip in speculative positions in the 10y we have seen in quite a while”; MORE
• Finding implies that “a positive uptick in data or an increase in vol could trigger significant long positioning unwinds”; with market already pricing in more than 70% chance of a June hike, positive surprises “would have to come from global growth or Congress”