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Considering the Consensus


A famous billionaire investor recently publicly stated he is betting against 30-year US Treasuries for its attractiveness as standalone bet and as a hedge against the impact of higher rates on stocks.


His reasoning is that if inflation stays at 3%, instead of dropping to 2%, long-term US Treasury rates could hit 5.50%.


He may be correct, but there is an abundance of bearishness in the fixed income space and the risk-to-reward of shorting long-term Treasuries at this level seems out of balance.


One consideration is to empathetically articulate bearish outlooks. If it is easy to justify and the market appears overcrowded, then wouldn’t it already be priced in?


How easy is it to be bearish? Here are just a few reasons:

1. The Fed’s battle against inflation

2. Post pandemic supply constraints & demand stimulus

3. Economic growth surpasses expectations

4. Deficit spending & increase in US Treasury supply

5. Global central banks’ policy pivots


Market positioning:

Aside from the media, anecdotal evidence, and large money market fund balances, one way to help determine market positioning is analyzing the Commitment of Traders report published weekly by the Commodities Futures Trading Commission (CFTC).

The ‘Leveraged’ category otherwise known as Large Speculators or Non-Commercials is approaching an extreme level of net short positioning. Smaller non-reportable speculators are technically still long, so it doesn’t appear that everyone is net short.


While not outright reasons to bullish by themselves, it is important to take notice when bearish sentiment and market positioning reach extreme levels.


 

Sources:

The Commitments of Traders (COT) tool provides a graphical representation of data from the Commodity Futures Trading Commission's (CFTC) report on market open interest.

 

Disclosures:

This content has been prepared for informational purposes only and should not be considered as investment advice. This commentary is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice.


We recommend all investors to consult with a financial and/or tax advisor before taking investment decisions.


Please visit our website for a complete list of disclosures and risks: www.maustininvestments.com.



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