Every week JP Morgan surveys their fixed income clients, asking them if they are overweight duration (green), underweight duration (red) or neutral (not shown).
This week’s survey shows 42% are underweight, just off the highest such weighting since September 2005. Subtracting the underweight percentage from the overweight, the bottom panel of the chart shows a 31% “net underweight” position. This is just off the -39% net underweight position on October 2, which was the largest net short since 2006. In other words, portfolio managers are extremely bearish on bonds.
A horizontal line in the bottom panel of the chart above helps denote each time the net position of the Morgan survey crosses below -25%. This is a fairly extreme level of bearishness.
So what happens to yields when managers become this bearish? The chart below shows the cumulative change in yields from the point when the net position first crosses below -25% until it hits 0%. The blue line shows the change in yields since October 2, when net positions last crossed below -25%.
Note that whenever this survey crosses below -25%, yields stop going up.
The black line below shows 10-year yields. The various colored lines are quarterly forecasts compiled by Bloomberg from roughly 70 economists.
Note that each subsequent period’s forecast is higher than the last. This means economists are almost always bearish. The further out into the future one goes, the higher their yield forecasts get.
Actual yields rarely cross above any of the forecasts. They did in March and again in July. Soon after that yields peaked and fell.
Will this pattern repeat now that yields are approaching forecasts?