The highest US yields since November are beginning to attract some opportunistic buyers, even as negative sentiment remains firmly entrenched throughout the Treasury bond market.
Treasuries rose on Wednesday, sending two-year yields down about 4 basis points to 4.95%, and trimming some of the recent surge in rates.
The latest client survey from JPMorgan Chase & Co. showed that investors were net long on Treasuries by the most in three weeks as of Monday. Meanwhile, in the options market, traders appeared biased toward unwinding at least some of their bearish positions, potentially locking in profits as US two-year yields surged to as high as 5%. Simmering Middle East tensions may also be providing some support for the safety of government bonds — but not enough to spark a rebound.
Treasury bonds have slumped this month as traders responded to data showing continued economic strength and stubborn inflation by drastically scaling back expectations for Federal Reserve interest-rate cuts. Fed Chair Jerome Powell added to the malaise on Tuesday by saying the strong readings will likely keep the central bank on hold for longer.
The persistent negative tone in the market can be seen in the magnitude of the buildup of bearish positions in open interest patterns across two-year Treasury futures where new positions, rather than liquidations, have been apparent in 13 of the past 14 trading sessions as yields have climbed.
“Our futures positioning proxy suggests rates are biased higher, particularly at the front end,” Bank of America strategists including Meghan Swiber wrote in a note on Monday. They add that commodity trading advisers are also starting to spread out their short wagers to longer maturities, too.
While the JPMorgan survey points to some recent dip buying, other data from the Commodity Futures Trading Commission suggests otherwise. Since the start of February CFTC data has shown asset manager net duration longs cut in eight of the past 10 weeks, including the most recent weekly data up through April 9.
Some traders are hedging their bearish bets. Elevated demand for protection against the possibility of aggressive rate cuts has been seen in the options market linked to the Secured Overnight Financing Rate, which closely tracks the central bank policy rate.
Here’s a rundown of the latest positioning indicators across the rates market:
Treasury Clients Add to Longs
JPMorgan’s survey of Treasury clients for the week up to April 15 showed longs rise 4ppts, shorts drop 6ppts and neutrals gaining 2ppts. The shift in positioning may reflect growing flight-to-quality concerns given last week’s report showed clients as net neutral — and not net long — for first time in almost a year.
Hedge Funds Covered Shorts into CPI
CFTC data up to April 9, a day before the latest US inflation report, showed that hedge funds unwound short positions, continuing a trend since the start of January. The latest round of covering was equivalent to roughly 112,000 10-year note futures equivalents, the biggest since Feb. 27. Since the start of the year, hedge funds’ duration short has been unwound in 11 out of 15 weeks. On the flip side, asset managers have been moderating net long positions over the same time period. In the latest data, “real money” accounts unwound almost 100,000 10-year futures equivalents to their net duration long positions, the data shows.
Read the full article here by Edward Bolingbroke of Bloomberg News, Advisor Perspectives
