2-Year Treasury Shorts at Risk?
Into today’s FOMC, BofA’s CTA model shows while trend followers have mostly covered their long-maturity Treasury shorts, there remains a healthy amount of short-maturity shorts which could be at risk from a dovish Warsh:
▪ 20- and 30-year: covering done
▪ 7- and 10-year: inside their covering ranges, the 10-year ~1bp from finishing
▪ 2- and 5-year: shorts still on
The 2-year in particular is highly sensitive to Fed rate expectations. Because the front end is less volatile, BofA thinks those shorts were likely larger at their peak than the long-end ones already unwound. Yields there need to fall another ~7–9bp to start covering, a level BofA calls the “key threshold for a rally extension risk.”
So an unexpectedly dovish Fed could set off a sharp move lower in front-end yields, as covering adds to the rally.
