US Long Term Treasury Short Bias

As the Fed continues its long and hawkish stand on its rate policy. i sold to open 7 new ZB September futures contracts positions on Aug 17th, which is the date of 20-year bond auction date. I’ve attached the tentative auction schedule here for your convenience. As of the date of writing, i am still holding onto this position while closely monitoring the yield curve on the 20 year bond. I’ll share some of my thoughts on why this has stayed such a heavy holding in my portfolio.

First i’ll list out the reasons why I entered this trade.

1. As inflation pressure persists based on past couple release on CPI and other relevant inflation readings data release,
2. Swap market implied potential additional rate hikes going into 2024 and no sign of rate cut before the first half of 2024.
3. Bill Ackman’s shorting 30 year bond as a hedge against the impact of the longterm rate on stocks, and suggesting 5.5% yield on 30 year bond. More details on this could be found here.
4. The continuance of yield curve upward shifting movement and increasingly inverted yield curve across all tenors. ( will attach graph soon)

Now, I’ll list out the reason why I hold onto this trade since (I roll over the contracts one week ahead of its expiration date).

1. US bond credit rating downgraded to AA+.
2. Surging amount of US bond supply influx coming from auctions lead by removal of debt ceilings.
3. Oct 4th, 30 year yield touching 5% for the first time since 2007.
4. Overall bond selling trend since the beginning of the rate hikes.
5. China selling US treasury holdings at an increasing
6. Declining FED balance sheet
7. Hedge funds’ treasury basis trade selling pressure

My risk management strategies are mainly consisted of occasional call buying as hedges on the day of sudden upward price change of the futures itself.

Oct 11, 2023 UPDATE

Due to the recent conflict broken out in the middle east, investors are seeking safe haven in treasury. I bought short dated calls as hedges, will keep close eye on situation and may exit the short positions temporarily.

Oct 12, 2023

CPI data came out hotter than expected, FED statement come out hawkish underscoring persistent inflation. I stayed on my short positions.

Oct 23, 2023

I completely covered my short with the only remaining positions of calls sold.

Inverted Yield Curve Flattening