Leverage in the U.S. Treasury market is increasing as asset managers and leveraged funds rebuild their long and short positions in Treasury futures contracts. Asset managers' aggregate long position in two-, five-, and 10-year Treasury futures rose to a record $1.045 trillion, while leveraged funds' aggregate short position reached a two-month high of $858 billion. The rise in leverage is driven by the attractiveness of higher yields and the 'basis trade' for market participants. Regulators have warned of financial stability risks if leveraged funds are forced to quickly cover their positions. [de3ee09c]
Bond traders are cautiously increasing their bets for easing this year following a government report showing weakness in job and wage gains. US Treasuries surged after the report, with yields on Fed-sensitive two-year bonds leading the market gains. Federal Reserve Chair Jerome Powell's comments signaling potential rate cuts also provided relief for the market. However, despite signs of slowing in some parts of the US economy, inflation remains stubborn, potentially limiting what the central bank can do and keeping bond yields stuck at recent levels. The outlook for longer-term bonds, such as 10- and 30-year Treasury securities, is less compelling for investors if inflation remains above the Fed's target. Some investors are skeptical about fully embracing longer-dated debt at the moment. The data remains mixed, with separate reports revealing persistent price pressures in the manufacturing and services sectors. The upcoming auctions of $67 billion in 10- and 30-year Treasury bonds will test demand for longer-term debt. Economic data and auction calendar dates are provided for the upcoming week.
US treasuries are reverting back to their traditional role as a source of income for investors, with over 90% of Treasuries carrying coupons of 4% or more. Last year, investors pocketed nearly US$900 billion in annual interest from US government debt, double the average over the previous decade. The newfound income from treasuries may be playing a role in keeping the 'higher-for-longer' narrative intact and supporting the economy. Money-market funds and bond funds have seen significant inflows, and the amount of debt held by households and non-profits has surged 90% since the start of 2022. The reset in yields for high-quality debt will have broad implications for buyout firms, hedge-fund managers, and private-credit shops. Bonds are now considered a 'tremendous value' compared to stocks. Yields are not expected to revert back to their post-financial-crisis levels even after the Fed starts cutting rates, as inflation concerns and the massive US deficit are likely to keep rates from falling too far. [3aa40b10]
Fixed income assets are attracting investors as benchmark rates in the US have jumped from 0% to over 5% in two years. [777a4316]
The global bond rally will face a test as the US Treasury begins sales totaling $125 billion this week. Investors will have to absorb $58 billion in three-year Treasuries on Tuesday, followed by $67 billion of 10- and 30-year Treasury securities later in the week. The sales will determine if investors are still interested in buying Treasuries after the recent decline in yields. The rally in Treasuries was sparked by Federal Reserve Chair Jerome Powell's comments signaling potential rate cuts. The continuation of the rally will depend on upcoming economic data and the US inflation report for April. US yields remain elevated compared to earlier this year, which has kept buyers engaged in recent auctions.
Top bond forecasters are diverging on their predictions for US Treasury yields as the Federal Reserve keeps the market uncertain. Anshul Pradhan of Barclays Capital predicts that 10-year yields will likely push higher, possibly re-testing the 16-year peak of 5% that was hit in October, as the US economy keeps powering ahead. On the other hand, Stephen Stanley of Santander US Capital Markets expects the benchmark yield to hold steady through June and drift down to 4% by December, anticipating that the Fed will have leeway to start taking its foot off the brakes. The divergence underscores the uncertainty that has continued to grip the financial markets even 10 months after the US central bank wrapped up its most aggressive rate-hike cycle in four decades. [70c6bd15]
Leverage in the U.S. Treasury market is increasing as asset managers and leveraged funds rebuild their long and short positions in Treasury futures contracts. Asset managers' aggregate long position in two-, five-, and 10-year Treasury futures rose to a record $1.045 trillion, while leveraged funds' aggregate short position reached a two-month high of $858 billion. The rise in leverage is driven by the attractiveness of higher yields and the 'basis trade' for market participants. Regulators have warned of financial stability risks if leveraged funds are forced to quickly cover their positions. [b2fbf898]