Speculators have trimmed their bets on falling U.S. government bond prices and higher yields. The size of the wager is down by nearly half from record levels reached at the end of September. Those investors held a net short position of 393,802 Treasury futures contracts as of Tuesday, according to the most recent data available from the Commodity Futures Trading Commission. That is down from a record net short position of 756,316 in late September.
An investor taking a short position in Treasury bond futures sells a contract, intending to profit by buying it back later at a lower price or delivering securities that could be sold at a lower price. Shorting Treasurys is a trade cited several times by Bank of America Merrill Lynch as among this year’s most crowded.
Investors have sought a haven in U.S. government debt, as stock market volatility increased along with concerns about the pace of global growth and the effect of trade tensions between the U.S. and China.
Such concerns helped spur a recent Treasury rally, at one point driving yields lower in 16 out of 18 trading sessions from mid-November into early-December. Those issues dragged the 10-year yield—which falls as bond prices rise—away from a seven-year high of 3.232% hit last month. The rally squeezed many investors who had bet on higher yields and forced them to close their wagers or risk further losses, some analysts said.
“Risks have started to emerge in people’s minds,” said Michael Collins, a senior portfolio manager with PGIM Fixed Income. “People recognize that credit risks are elevated and growth is poised to slow globally.”
While the U.S. economy remains strong, and few forecasters see a significant chance of a recession, lower government bond yields reflect a renewed appreciation of the balance of risks confronting investors, analysts said. The U.S. economy—which expanded at a 4.2% pace in the second quarter, the fastest since 2014—is expected to decelerate next year, weighed down by tighter financial conditions, trade frictions and the declining impact of recent tax cuts.
Many investors said they now expect Fed officials will reduce their forecasts for interest-rate increases next week, when they are expected to raise rates for a fourth time this year. Policy makers penciled in three increases for 2019 and one in 2020 at their September meeting.
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U.S. government-bond prices edged lower Thursday after data showed the economy remains on solid footing, yet with few signs that inflation is building. The yield on the benchmark 10-year Treasury yield rose for a fourth consecutive session, to 2.911% from 2.908% Wednesday. The 10-year yield had fallen to 2.851% Friday from a seven-year high of 3.232% last month.
Yields, which climb when bond prices decrease, were higher after the Labor Department said Thursday that the number of workers making first-time jobless claims declined last week.
That climb was moderated by a separate Labor Department report Thursday that showed prices for goods imported into the U.S. declined in November. The data suggests that rising tariffs imposed by President Trump have yet to produce significant inflationary pressure, analysts said.
Investors are looking for any signs that would suggest a shift in the pace of growth as Federal Reserve officials are expected to become more dependent on fresh information about the performance of the economy when making decisions about setting interest rates.
Expectations for Fed rate increases in 2019 have declined in the past month as investors have focused on signs that economic growth will slow further from its rapid pace earlier this year. While U.S. output increased at an annualized rate of 4.2% in the second quarter, the Federal Reserve Bank of Atlanta’s GDP Now tracker currently estimates a 2.4% growth rate for the last three months of this year. At the Fed’s September meeting, policy makers penciled one more rate increase this year and three more in 2019.
Fed funds futures, which investors use to bet on the direction of central-bank policy, show a 13% probability that the Fed will raise rates three times by the end of June. That is down from 29% a month ago.
After an expected rate increase at its meeting next week, the Fed is likely to lower its forecast for rate increases in 2019 to one or two, said Paula Solanes, a bond manager at Silicon Valley Bank. “Fundamentals are still strong, but I think they’re softening,” she said. “We’ve seen the Fed change its perspective and become a little less hawkish.”