My understanding is that HF that short the US Treasury will need to buy the spot in order to deliver at the maturity date. Won't that increase the demand for UST and reduce yield instead?
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1$\begingroup$ sometimes it makes more sense to look at the fundamentals driving yields. at the moment it seems to be the negative convexity mortgage lenders have to deal with in a high rate env + a fed reducing its balance sheet. these guys are heavily lent at these rate levels and their positions dwarf anything HFs are trading. $\endgroup$– user35980Sep 29 at 8:51
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3 Answers
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The guys shorting the futures are expressing a view on the basis between the future and its CTD deliverable, they're not trying to predict rates let alone influence them.
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I wouldn't give these explanations much credence. You can always concoct some explanation ex post. For ex. if we see increased shorting and a spike in yield you could say "the futures traders are the smart money, they predicted a spike in yield and sure enough it happened". Or "it's the Global Macro funds again, shorting futures". Sounds intelligent but who knows if it is true? Best to be skeptical of these narratives IMO.
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$\begingroup$ Completely agree. Even if it is true, the missing information such as the 'the domestic RV funds are buying' may or may not be enough to counteract the expected market flow. Impossible to know. $\endgroup$– Attack68 ♦Sep 29 at 7:12
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Isn't it easy to check this thesis by checking what's happened to ctd basis recently? If there's more demand to long basis, it should widen..
Also swap spreads / invoice spreads might be a good indicator.
