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JPMorgan Chase & Co.’s quantitative and derivatives strategy team warns of potential short squeeze in US treasuries.

Marko Kolanovic, on JPMorgan's quant team offers a word of warning to treasury bears.

“When there is such a large short position, there is always risk of profit taking, or worse, a proper short squeeze,” wrote Kolanovic in a research note.

“We also note extreme sentiment swings and the media playing into fears of inflation, while largely ignoring important points such as those most recently voiced by the Fed’s Harker and Bullard,” he said, referring to Federal Reserve district bank presidents Patrick Harker and James Bullard.

“Inflation discussions have recently centered around ‘linear extrapolation’ of inherently noisy data points, and focus on old news,” such as minutes from the Fed’s January policy meeting, he wrote. “There is no mention of structural deflation via demographics or technology/AI.”

Speculator Short Interest

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I prefer the COTPrice Chart because it breaks out big vs small speculators. It's the big speculators, think hedge funds, that most pressed their bets. The small specks are perpetually short it seems.

Open interest did decline in the past week, but once again the data is old. We do not have a real-time position on this. COT data typically comes out on Friday as of the prior Tuesday. I will update the above chart when the data is posted later today.

Short Squeeze?

For starters, profit taking should not be a concern. And in general, listening to Fed presidents is not a winning strategy.

However, the current inflation bet is getting quite long in the tooth as is the recovery. When the next recession hits, I expect treasury yields will collapse.