Over the weekend, when looking at the supply dynamics of global Treasury paper, we wrote "Bond Yields Set To Plunge In 2015: Next Year Global Treasury Supply Will Tumble By 20% As ECB Joins The Party." This morning, Bloomberg picks up on this with "The $6.3 Trillion Frenzy That Vanquished Treasury Bears", in which author Daniel Kruger writes:

When it comes to the ability of the U.S. government to finance itself in the bond market, this year will go down as as one of the best on record -- and dealers say 2015 will be no different.

There’s global demand for high-yielding, high-quality assets and the only one that’s in the game is the U.S. bond,” Thomas Tucci, the head of Treasury trading at CIBC World Markets Corp., said in a Dec. 12 telephone interview from New York. “People continue to undervalue it.” ... Wall Street forecasters, who cut their estimates for how much yields will rise for 11 straight months, now say there’s little chance they will reach 3 percent before the end of 2015 -- the same level where yields started this year.

Treasuries of all maturities have gained 6.1 percent this year, the most since 2011, according to index data compiled by Bloomberg. That’s pushed down yields on the 10-year note, the benchmark for trillions of dollars of securities worldwide, 0.86 percentage point to 2.17 percent as of 8:53 a.m. in London. At the start the year, forecasters projected 10-year yields rising to 3.44 percent on expectations the Fed’s stimulus would boost the economy and allow the central bank to move toward ending its six-year-long policy of holding interest rates close to zero.

None of that is new. What, however, assures that the relentless low in TSY yields continues is that, courtesy of a market that is so broken and counter-intuitive that for a record 6 years bad news is good news, and the worse the economy the higher stocks and bonds go, hedge funds will continue bidding up Treasurys, which they bought on hopes that this time the recovery will be right around the corner.

And sure enough, as BofA reports overnight, hedge fund specs "sold 10-yr contracts increasing net short position to largest in three years. 10-yr contracts have now been sold in six of past seven weeks."

From BofA:

10-yr T-notes

Large speculators strongly increased their net short position to -$25.8bn from -$20.1bn notional.

With equities resuming their larger bull trend, and 10s reversing from 2.067%/2.040% resistance, the bear trend is resuming. A break of 2.227% confirms, targeting 2.404% & beyond.

 

As we said over the weekend, see you in the mid- to upper-1% range soon.