Treasuries traders are taking bets off the table ahead of short inflation numbers, with benchmark rates breaking their recent trading range in a shakeout of key positions.
Yields closed on Thursday after falling this week to slash at the lowest since March. The moves come as a measure of market positioning shows traders were unwound on Wednesday the equivalent of almost $7 billion in 10-year cash bonds, a sign that the market may be prepared to look past the prospects of a higher-than-expected reading.
Markets have become fixed on the sustainability of inflation as the global economic recovery continues to gain traction, as it may add to the case for the Federal Reserve to start discussions on withdrawing stimulus. U.S. data Thursday is expected to show annual prices, which has increased by 4.7% in May since 2008 and have built on a market jump the previous month.
The bond positions have been near their shortest since September 2018 according to JP Morgan Chase Co. s latest client survey, taken on Monday. Traders appear to have cut back since then, with outstanding interest in 10 year bonds - a measure of preliminary positioning - losing by over 75,000 contracts on Wednesday.
'We have a covering of short positions and the market also seems to have really bought the dovish, patient line the Fed has been pushing on inflation in a note from Nomura Holdings Inc. strategist Andrew Ticehurst.
The benchmark German Treasury yields fell to 1.50% on the day, in line with the United States Treasury and their bonds, after they have lifted eight basis points in the last two days. The yields in Europe and Asia have also declined lower, with the 10-year yield of Australia - offsetting 1.50% on Thursday to fall below 8.
Without a fundamental catalyst, we think that the drops in yields over the last couple of sessions have been driven largely by technicals, especially given the breadth of short time positioning, wrote JPMorgan strategists including Jay Barry in a note.
Ten-year bond yields in the US and Australia may fall to 1% as investors gradually embrace the view that the price pressures are intermediate but unlikely to maintain this trend in the long term, said Hidehiro Joke, a senior bond strategist at Mizuho Securities Co.
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