Bond traders, who recently positioned themselves for over six interest-rate cuts from the Federal Reserve in 2024, are displaying signs of reconsideration. JPMorgan’s recent Treasury client survey revealed the most significant net decline in long positions since May 2020, covering the week through January 2. This shift was driven by a reduction in long positions and the initiation of new short bets, reflecting skepticism regarding the likelihood of central bankers swiftly abandoning their anti-inflation stance.
Despite expectations that the Federal Reserve’s meeting minutes on Wednesday would reinforce the recent rise in yields, the 10-year Treasury yield retreated below 3.9% after initially surpassing 4% earlier in the session. Front-end yields experienced minimal changes in volatile trading, with the minutes indicating officials anticipated maintaining a restrictive policy stance “for some time” before potential rate cuts later in the year.
Ed Yardeni from Yardeni Research expressed a cautious perspective, stating on Bloomberg TV, “I don’t think they are in any rush to ease. The economy has been doing fine. The unemployment rate is still below 4%. Inflation is coming down but it’s not at 2% yet.”
A sense of caution has also manifested in the Treasury futures market, where recent price action aligns with the initiation of new short positions. Overall, a combined $7.6 million per basis point move in risk was added across all tenors, excluding the 5-year notes. Additionally, options linked to the Secured Overnight Financing Rate have shown renewed interest in hawkish hedges.
The pressure on Treasuries at the start of the year has been influenced by significant movements in core European rates, particularly a more than 10 basis point climb in UK 10-year yields on Tuesday. Concurrently, a robust beginning to US dollar corporate deal flow has further impacted the market. Wednesday’s session is anticipated to witness an additional 13 names pricing deals, following nearly $30 billion in issuances on Tuesday.
Nevertheless, rates traders continue to factor in approximately 1.5 percentage points of rate cuts, equivalent to six 0.25 percentage point moves, by the end of the year. The market sentiment reflects ongoing uncertainty about the trajectory of interest rates and the Federal Reserve’s policy stance amid evolving economic conditions.
