(Bloomberg) — A recent surge of bullish positioning in the U.S. bond market has come to the fore, as comments from two Federal Reserve officials and new evidence of persistent inflation increased the chances of interest rate hikes, sending Treasuries into a tailspin.
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Tuesday’s selloff reverberated throughout the Treasury curve, with traders anticipating more aggressive tightening from the Fed after Gov. Christopher Waller said he supported raising rates and would favor a half-point hike if inflation continued to accelerate. A stronger-than-expected consumer price report fueled the shift, as did other hawkish comments from Dallas Fed President Lori Logan.
The rout — which sent two-year U.S. yields to the highest in 19 months and briefly pushed 10-year yields back above 5% — upset investors who had lately flocked to Treasuries or become less pessimistic in response to recent market jitters around AI trading.
Over the past week, asset managers continued to establish long positions in futures across the curve, while hedging long-term bearish bets, Bank of America Corp. strategists wrote. in a note dated November 8.
Today, however, as traders increasingly anticipate Fed tightening ahead of next year’s March meeting, the two-year yield, sensitive to monetary policy, “still has room to get back to where we were at the end of September,” when it peaked just below 5%, said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments. It ended Tuesday at 4.73%.
In the cash market, divergent crosscurrents have left some investors struggling to find direction. The JPMorgan Chase & Co. Treasury client survey released Tuesday reveals declining conviction levels, with safe-haven tactical long positions and long-term short positions clashing. The survey showed that both long and short positions fell sharply, leaving neutral positions at their highest level in about 12 weeks.
Not all traders were caught off guard by Tuesday’s selloff. In the options market, last week’s flows have started to show signs that traders are unwinding their safe-haven hedges. On Monday, a big seller of five-year January 107.00 calls appeared to unwind a bullish hedge established in late October, but at a loss of about $3 million.
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