i like to look occasionally over cot data and what i have noticed is how consistently wrong large and to a lesser degree small spec are...now i dont know maybe large specs are laying off in the bond their exposure to cds cdo junk whatever...but these guys from the raw cot data are hopeless clearly short in the run up to the 130 handle now they are neutral/getting long just as it is breaking out to the downside...any comments?
There is some microstructure, markets with consistently different behavior, but on the whole, yes, only the commercial hedgers seem to know what they are doing in the Futures markets. A basic finance course tells us that commercial hedgers use the futures markets to hedge risk. The the timing usually is related to their internal business cycle, and not the market price. We are told that they fund the market by a risk-premium; because, locking-in their materials costs years in advance allows them great business efficiency advantages. Large speculators also have dedicated staffs of researchers, and are supposed to be in the business of receiving the risk-premium. The inside knowledge of a commercial hedger should only be their own future demand/elasticity. Since this is company specific and viable futures markets represent a plethora of buyers and sellers, this inside knowledge should not of great importance. In reality, commercial hedgers kick-butt in most markets. There is some degree of the expected purchase-for-use taking place so it is important to look at positions relative to their normal range. An unprecedented short group position is relevant, and also a much lighter than normal long group position can also be relevant.
Very hard to extract meaningful information from this. Could be reflecting just one side of a whole variety of trades.
I have seen several studies like this one that crunch the numbers and don't find that commercials (or speculators) predict returns. Of course that doesn't mean they are not missing anything though. But I don't remember seeing anything like this specifically on bond futures. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=996930