Citrini Research is betting on a 'Treasury twist' where the Treasury Department shifts its borrowing mix towards shorter-dated bills, potentially reducing the supply of long-term bonds. This could lead to a short squeeze in the 30-year Treasury bond, causing its yield to fall relative to 5-year bonds, creating a flattening of the yield curve.
Citrini Research anticipates a significant shift in Treasury borrowing strategy, dubbed the 'Treasury twist,' where the Treasury will issue more short-term bills and fewer long-term bonds. This change is driven by a proposed regulatory adjustment allowing banks to free up cash currently held for liquidity, which Citrini expects banks to deploy into short-term Treasuries. The reduced supply of 30-year bonds, coupled with heavy short positioning, could trigger a short squeeze, causing 30-year yields to fall relative to 5-year yields. This presents a short-term opportunity for traders betting on a flatter yield curve, particularly through the November 4th quarterly refunding announcement, though Citrini remains skeptical about the long-term implications of such a market reshaping.