These Are The Two Most Crowded Trades As We Enter 2015

One of the conventionally accepted reasons for the unprecedented hedge fund underperformance in 2014 was that the vast majority of the “smart money” left 2013 and entered 2014, just as the 10Y looked set to decisively break out above 3%, long equities, expressed primarily via the Nikkei which went nowhere for most of the year until in November the BOJ boosted its QE once more, sending the Nikkei surging but long after most stop losses had been triggered to the downside, and short the 10 Year Treasury. The reason: everyone, and certainly every commission- or CNBC appearance-paid pundit, was convinced that this year is when the long overdue and much delayed global recovery would finally take place, pushing inflation and long-end yields higher. Not only did that not happen but virtually the entire world's official economic data, except that of the US, has suffered, an unprecedented for the “recovery cycle” slowdown.

Still, that appears to not have made the tiniest impression on hedge funds, who for the second year in a row are not only massively short the 10Y, but in fact as the latest CFTC net spec data shows, are even shorter than they were a year ago, when the 10 Year was trading about 100 bps wider. Worse: as the chart below shows the only time in history when specs were shorter the 10Y was five years ago, in early 2010. What happened then was that the 10Y went from 4% to 2.5% in the span of just a few months, facilitated largely by one of the biggest short squeezes in 10 Year history.

The 10 Year is currently trading at 1.95%: a comparable short squeeze now to that that took place in 2010 would send the 10 Year yield crashing to level where the German Bund is trading now.

Will that happen, and how much more pain can hedge funds absorb before they get a collective tap on the shoulder, we don't know. We do know, however, that the unprecedented bearish sentiment toward 10Y US Treasuries among the speculative community makes it one of the two most crowded trades going into 2015.

What about the second trade?

For the answer we go back to a post, or rather an image we put up in late September of last year “Summarizing The “Long Dollar Trade” In One Chart.” The trade in question was the long-USD trade, and the “chart” was the following: