Short covering has played a pivotal role in the surprisingly strong rates rally we've enjoyed over the past 5 sessions.We have seen as much as .375% drop in rates over the past 5 sessions.

"Short covering" is when a bearish trader closes a position that was opened with the intention of capitalizing on lower prices/higher yields. The term "short" describes the trader's directional bias. "Covering" simply means closing the position. The resulting effect of short covering is a contraction in "open interest", which represents the number of open contracts in the marketplace. If a trader has set a short position and prices continue to rise, then their position is losing money.. Leaving a short position open as rates continue to rally can be dangerous because the position gets more expensive to close with every uptick in price. So it should make sense that as rates have continued to rally over the past 5 session, it has forced more short covering which has led to snowballing in the bond market.

Quoting as low as 4.25% on a 30 year fixed no points

 

JS jstarr@westtownsb.com

 
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Jon Starr

New Canaan, CT

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West Town Savings Bank

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