MBS Day Ahead: Striking Similarities in Trading Patterns Show Year-End Exodus

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Posted To: MBS Commentary

As we discussed yesterday, the flattening of the yield curve has been a dominant trading theme in 2017. It's also been a "crowded trade" for bond market participants, much in the same way that buying bitcoin was a crowded trade on Dec 5th-7th or that buying stocks has been since March 2009. In other words, it's something "everyone was doing" even though there are inherent risks in making the same trade that a majority of other traders are so clearly making. The past 3 days show the byproduct of "crowded trades." The "flattener" (traders betting on 2 and 10yr yields moving closer together) has quickly been unwound, meaning traders are exiting those positions en masse. This can be seen most easily in the green line moving higher in the chart below…(read more)

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