(Bloomberg) -- Record bullish positions are building up across currency, equity and commodity markets as hedge funds and real-money investors dump the dollar and U.S. Treasuries to crowd into risk assets around the world.
Goldman Sachs (NYSE:GS) warns that “extreme” sentiment is propelling global shares to their best start to a year ever, while U.S. government bonds head for their worst on record. Investors are throwing caution to wind to wager more gains are nigh. Those piling into same-way bets are causing some to warn that markets are dangerously close to overextended.
"There are some notable net long and short positions that are moving into stretched territory," said Ben Emons, chief economist at Intellectus Partners LLC and a contributor to Bloomberg View. "This positioning speaks very much to the global synchronization theme out there whereby the dollar plays a pivotal role."
Options traders are now the most bullish on the sterling in almost a decade, while speculative investors have amassed the heaviest long positions on the euro ever.
Strong corporate-earnings growth, the easiest U.S. financial conditions in 19 years and the fastest global expansion since the start of the decade are turbo-charging risk assets and overseas growth, a headwind for the greenback.
In a sign investors are betting the global industrial upswing will endure, hedge funds reported record wagers on continued price increases for U.S. and global oil benchmarks, the latest open-interest data show. The weak dollar, sliding U.S. stockpiles and OPEC’s bid to crimp supply have propelled oil prices to three-year highs.
It’s no surprise then that the S&P 500 has gained 7.5 percent this month, on track for its best start to the year on record. Investors are laughing in the face of indicators that show the benchmark gauge is in its longest overbought stretch in more than two decades.
Asset managers raised net S&P 500 index future longs to 363,000 contracts, the biggest bullish position in five years, the latest Commodity Futures Trading Commission data show.
Appetite has picked up for contracts that pay off when the S&P 500 rises, sending option open interest on the SPDR S&P 500 ETF (NYSE:SPY), the largest of its kind, earlier this month to the highest since 2011. Though it’s since moderated, open interest remains 30 percent above the 10-year average.
And while the S&P 500 Index and Cboe Volatility Index are both heading for monthly advances, asset managers are doubling down on wagers that subdued market conditions are here to stay.
With bulls firmly in control of global markets, it’s no surprise investors are dumping safe assets like U.S. government bonds, with yields on the 10-year benchmark touching the highest since April 2014 at 2.7 percent.
Speculators were bearish across the U.S. Treasury curve apart from the five-year note, with noncommercial shorts close to an eight-year high, according to the latest CFTC report. Speculators extended short positions on ultra-long debt to fresh all-time highs, while in the eurodollars market, asset managers placed record short wagers.
With unabashed enthusiasm for all things global, risky and with cash flows linked to global growth, credit markets are on a tear. Spreads on U.S. corporate bonds continue to grind lower to the tightest in over a decade, with high-grade premiums not far off 2005 lows.
It’s not just the U.S.: investors have poured more than $2 billion into the iShares J.P. Morgan Emerging Markets Bond ETF in January. After the fund already lured more than half the allocations it notched for the whole of last year, inflows are on track to record the biggest monthly sum since the fund’s inception in 2007 -- and short interest is nowhere to be seen.
“If everyone is on the same side of the trade, it could become extremely overextended and therefore it can be a possible reversal signal,” Craig Erlam, market analyst at Oanda Corp. in London, said. “The general conditions are bullish. But when there’s a turn for the worse, you don’t want to be the person to say it’s going to continue on for another year and then it falls off a cliff.”
(Updates corporate bond spreads in 13th paragraph.)
