Investors in the Treasury market are leaning towards the possibility of gains over losses in the near future, as expectations grow for a report to indicate a deceleration in the core inflation rate within the US economy.
With Treasury bonds currently at their weakest point this year, financial institutions like Wells Fargo & Co. are predicting a more significant market movement in response to a mild inflation report than to a higher one expected later this Wednesday.
As traders have been adjusting their forecasts for Federal Reserve rate cuts, the current market sentiment is leaning towards two quarter-point reductions within the year. A softer inflation figure could tilt expectations towards three cuts.
Mohit Kumar, a leading strategist and chief economist for Europe at Jefferies International, believes that the market is poised for lower interest rates and an uptick in riskier assets, especially if the inflation figures come in at or below the anticipated 0.3%.
"A sustained sell-off in rates and risky assets would only materialize if the inflation data significantly exceeds expectations, reaching 0.5% month-on-month or higher," Kumar stated.
Market positioning indicators, including CFTC data, reveal an increase in short positions within the Treasury futures market for the first time in two months, suggesting the market could be ripe for a short squeeze. A recent survey by JPMorgan Chase & Co. also displayed a rise in short positions, marking a shift to net neutral positioning for the first time in nearly a year as of April 8.
However, the market's reaction to forthcoming data may be complicated by Treasury auctions scheduled for Wednesday and Thursday, and yields are nearing levels that may attract investors looking to establish new long positions.
Jefferies’ Kumar is eyeing a dip in rates over the medium term and is prepared to purchase five-year Treasuries if yields exceed 4.45%, noting that they were around 4.36% on Wednesday morning.
Blake Gwinn, a strategist at RBC Capital Markets, suggested that the 10-year Treasury rate, which hit a peak of 4.46% on Monday, is unlikely to surpass 4.5% for the first time since November, even if inflation exceeds expectations. This is due to investor interest in higher yield levels.
Gwinn also noted some uncertainty regarding whether potential buyers would hesitate should yields breach the 4.5% mark.
