Halister News

(Bloomberg) -- Positioning will likely drive the current roll cycle, as asset managers remain “significantly net long in multiple contracts,” Citi strategist Jason Williams said in Aug. 18 note. 

• Market’s “depressed Fed expectations” may support a bullish bias for the front-end, though risks for a continued cheapening of GC against OIS could support a bearish bias for the cycle
• Bullish TUU7/TUZ7; longs should roll late, shorts roll early
  • Buy-side traders other than leveraged funds and asset managers have recently increased net shorts, which historically has caused the TU roll to richen; short speculative positions have increased to 27% of open interest from 18%
  • Risk to positioning view is recent increase in asset manager longs since the last cycle, which tend to cheapen the roll
• Bearish FVU7/FVZ7; longs should roll early, shorts roll late
  • Asset managers’ net long position accounts for ~29% of open interest, which “will likely continue to have an outsized impact on the roll,” similar to last cycle
  • Roll may see further richening pressure if UST belly rallies, “likely flattening the spread” between the front and back CTDs
• Neutral TYU7/TYZ7
  • Positioning unlikely to be a primary driver as long asset manager base is ~2% of open interest, which is lower than previous two cycles
  • Cheapest-to-delivery slope has seen “significant steepening pressure,” ~1bp during past three weeks, which may encourage longs to wait for a better entry level to roll forward
• Bullish UXYU7/UXYZ7; longs should wait to roll, shorts should roll earlier
  • Asset managers net short the contract, 16% of open interest, which tends to drive the UXY roll
• Neutral USU7/USZ7
  • CTD security will likely remain 4.5% Feb-36s for both front- and back-month contracts
  • Risks for longs waiting to roll may be a sharp selloff in rates or a discussion of new 20Y issuance, which could put pressure on the front CTD
• Bearish WNU7/WNZ7; longs should roll early, shorts should roll later
  • Positioning will be main driver since the net long asset manager position remains near multi-year highs; longs may be looking to roll earlier due to the large AM positions

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang