USFI, payroll declining open interest (in context)

March 8, 2016 09:53 AM

It is unusual when open interest in Eurodollars and Treasury futures declines on the session where the employment report is released. The reason for generally higher open interest results on these sessions may be that all parties involved have a greater confidence in their understanding of current conditions and are thus more willing to enter into new positions.

Of course, all Eurodollar and Treasury futures showed declining open interest as a result of trade last Friday (employment report). And while it might be overstepping our purview to say categorically that the declining open interest on Friday indicates a heightened level of indecision; it may not be a bad guess. We do suspect that there is a bit of a struggle of late in determining mindset as relates to geopolitical and economic conditions and prospects for domestic growth and Federal Reserve monetary policy.

In the last weeks, we have reviewed the extraordinary increase in open interest in U.S. fixed income futures in the month of January and noted also the tendency over the last 5 years toward a cyclical nature in the economic data – demonstrated aptly by the "Citi Economic Surprise Index – U.S."

Open interest and positioning changes reviewed in the context of the cyclical nature of past data and extraordinary price and open interest gains of January may provide a worthwhile perspective for developments over the last two sessions. I say last two sessions because like Friday, open interest and prices declined across Eurodollars and Treasury futures (all o.i. save Ultra) again on Monday.

U.S. fixed income prices were lower on Friday in sympathy of the strong employment report. This is not hard to understand. The reason that open interest declined may be for reasons already noted. The bullish contingent, having held onto positions despite price declines since Feb. 11, determined that the data provided in the employment report was definitive enough to conclude long positions were not as desirable.

It may be surprising to some to learn that CFTC described "non-commercial" accounts are net short all Treasury (futures and options) except bonds and Eurodollars. These account types often referred to as ‘large spec’ may be the forward line of a return toward pricing more ‘normalized’ monetary policy. If this is the case, one might look at today’s higher price action in Treasury and Eurodollar futures as an opportunity to enter bearish positioning strategies. 

Fed 9th note with charts of January open interest changes, Citi Eco Surprise Index

About the Author

Martin McGuire, managing director at TJM Institutional Services