A tentative deal by lawmakers that would avert a government shutdown may have some Treasury traders breathing a sigh of relief ahead of one of the bond market’s most frenetic trading periods of the quarter.
Another shutdown would mean more delays for the release of key positioning data, known as the commitments of traders report, from the Commodity Futures Trading Commission. These weekly reports break down net long and net short futures positions held by commercial traders, such as asset managers and other hedgers, and noncommercial traders, or speculators.
A lack of data would complicate planning for what’s known as the Treasury futures roll, when traders migrate positions from the expiring front-month Treasury futures contract to the second-month contract. Without that data, what’s usually a routine logistical operation for Wall Street trading desks could turn into a more nervous affair as some market participants struggle to time their roll.
“If you pick the right timing that can be worth a fortune. It can be very impactful for very large positions,” said Alastair Hawker, global head of sales at Quantitative Brokers, which sells trading algorithms to bond-market investors and traders.
The partial government shutdown that ended last month after 35 days forced the CFTC to suspend the release of the commitments data. The weekly reports, released on Friday, reflect the positioning as of the previous Wednesday. The CFTC resumed publication on Feb. 1 and is now playing catch-up through an accelerated schedule.
The most recent report reflected positions as of Jan. 15, and the agency expects to be fully up to date by March 8. By the time the roll starts to pick up in earnest toward the end of the month, investors will have positioning data as of Feb. 12.
President Donald Trump made clear Tuesday he wasn’t “thrilled” with a deal on border-security funding struck by lawmakers but CNN reported Wednesday that he intends to sign the legislation, which would avert another government shutdown at the end of the week. If so, that will be a relief to traders who might have worried about further delays in positioning data.
To get a sense of why traders like to size up market positioning ahead of the roll, take the coming migration to the June futures contract TYM9, -0.19% from the March TYH9, -0.19% contract.
First, the roll occurs because most interest-rate futures players, whether hedgers or speculators, aren’t looking to use the market to transfer physical ownership of the underlying securities. Therefore, they’re inclined to roll their positions out of the front-month contract as it enters its delivery period, moving to the next available month.
The roll period typically hits its peak two to four days before what’s known as “first intention day,” which comes two business days ahead of the beginning of the nearby contract’s expiration period and marks the first day that longs can be selected to take delivery. The current roll is expected to hit its stride between Feb. 25 and Feb. 28.
For speculators, it’s helpful to know the relative size of the position held by money managers and other commercial players. For example, if money managers are holding large net long positions, their move en masse during the roll will have a larger impact on the spread between the front- and second-month contracts. The price of the front-month contract will come under pressure as they liquidate, while the price of the second-month contract rises.
Speculators looking to roll over their own long positions might then choose to do so well before first-intention day to take advantage of the inflows into the later contract. On the other hand, a trader rolling over a short position would buy the nearby month, closing that position, and sell the second month, re-establishing the short, closer to the first-intention date, after the spread has already narrowed.
“Generally, if you have a sizable position in futures, before you roll it, you would like to know which way the market is leaning,” said Boris Rjavinski, a senior rates strategist at Wells Fargo Securities.
Yet if asset managers aren’t holding significant long positions, the wave of inflows into the second month and therefore the price difference between the two contracts will be more subdued during the roll, so traders won’t care as much when they make their move, said Yu Wen, an interest-rate derivatives strategist at TD Securities.
Others played down the significance of the CFTC data, arguing that investors already have a strong sense of current positioning. With the Federal Reserve signaling a more patient approach to further rate increases, asset managers are likely to have racked up bullish positions on bonds, especially for longer-dated Treasurys. Higher interest rates can weigh on prices for government paper.
“Not knowing the exact positioning, doesn’t make it more volatile than otherwise,” said John Brady, senior vice president at futures brokerage R.J. O’Brien & Associates.
The most recent data, reflecting positioning as of Jan. 15, showed asset managers have built up net long positions of more than 1 million contracts for both the 5-year note and 10-year note futures.
Regardless, for speculators trading sizable positions, getting the timing right is important.
“If positioning is off-balance there can be a certain amount of volatility in that spread. If you pick to roll at the wrong time, there could be an economic cost to that,” said Rjavinski.
And that’s where the lack of CFTC data could play a role, according to Hawker.
“If those reports aren’t available, people will find it harder to do forecasts. It will be harder to pick their timing. It will affect their decision-making,” said Hawker, a former head of electronic trading at Goldman Sachs.
Traders said the roll doesn’t have much lasting effect on Treasury yields TMUBMUSD10Y, +0.70% but a lack of data could lead to more treacherous trading during the roll.
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The transaction costs from a badly-timed roll could amount to as much as a tick, said Hawker. For portfolio managers who trade frequently, a loss of less than a tenth of a percentage point can compound quickly after several trades, especially when the trading volume “can be very significant relative to the assets under management,” said Hawker.
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