Source: Golden Ten Data
If the US CPI weakens in March, the market reaction is likely to be even more drastic.
The US CPI for March, which is seen as an important piece of the puzzle for the Fed's interest rate cut this year, will be announced tonight. Before this key data was released, US Treasury traders became extremely bearish. Once the actual data is not as popular as they expected, their US debt short positions may be squeezed.
Weekly data from the US Commodity Futures Trading Commission (CFTC) shows that at a time when US bond yields have recently risen, funds that use loan funds to amplify leverage have increased their short positions in US bond futures for the first time in two months. Investors have also increased their short positions in the spot market. According to J.P. Morgan's latest customer survey, as of April 8, clients' short positions increased, and for the first time in nearly a year, there was a net neutral position rather than a net long position. However, direct short positions are still the largest since the beginning of the year, while direct long positions are the fewest since February. According to CFTC data, in the week ending April 2, leveraged funds expanded their net short positions for the first time since the end of January.
US bond yields hit a high during the year this week. Earlier, there were signs that the US economy was strengthening. Coupled with cautious remarks from Federal Reserve officials, traders continued to lower their expectations for interest rate cuts in 2024. Both last Friday and Monday's trading sessions showed that short positions on US bonds increased, and changes in open contracts reflected traders hedging the risk of further increases in US bond yields.
On Tuesday, US bonds recovered some of their recent losses, and yields fell slightly from their high point. Now, traders are awaiting the CPI report to be released on Wednesday. This report may confirm the Federal Reserve's more hawkish stance, and may also cause interest rate cuts to be repriced again.
Economists forecast that overall CPI and core CPI both rose 0.3% month-on-month in March. Wells Fargo analysts wrote in an April 5 report that due to such pessimistic positions in the US bond market, if the actual published data appears weak, it may trigger a more intense reaction in the market.
They wrote, “After the recent poor performance of the bond market, we believe that if the core CPI falls below 0.3% expected by foreign media, the reaction of US bond yields will be more intense than when the core CPI exceeds expectations.”
There are already signs that some investors may be considering closing positions before the CPI data is released. A record short-term interest rate futures bulk trade boosted short-term bond gains significantly on Tuesday, which appears to be in line with the behavior of a direct buyer.
The deal involved Guaranteed Overnight Financing Rate (SOFR) futures. Shortly after 9 a.m. New York time on Tuesday, 75,000 SOFR futures contracts due in December 2024 changed hands. The Chicago Mercantile Exchange confirmed that this was the largest transaction in this product to date. The subsequent rise in price indicates that the deal was initiated by the buyer, while US bond yields slipped further to intraday lows.
If the US March CPI data released tonight performs well, and the expectation that the Fed will cut interest rates three times this year heats up again, then direct long positions on this contract will profit. However, the trade may also be aimed at recovering short positions, thereby reducing risk before the data is released.
With yields at a high point during the year, this large-scale transaction may be an early sign that some people think US debt bears are overstretched. Additionally, CFTC data shows that some asset managers have recently been willing to take more interest rate risks.
On Tuesday, State Street Global Advisors (State Street Global Advisors), which manages $3.6 trillion in assets, predicted that the Federal Reserve will actively cut interest rates by 50 basis points in June, which further strengthened confidence in the outlook for inflation. Meanwhile, US President Joe Biden's chief economic adviser Lyle Brainard told CNBC that she expects steady progress on the path to reducing inflation over the next few months.
editor/tolk