The US deficit greatly exceeded expectations, but "long US Treasury bonds" trading is still back

The cooling of US inflation has reignited market expectations for interest rate cuts, with the weak overnight retail data further adding fuel to the fire, overshadowing concerns about the US fiscal deficit, and boosting bullish sentiment for US Treasuries.

In the past week, trading in long US Treasuries has surged. A bond client survey by Morgan Stanley showed that in the week ending June 17, bullish positions in US Treasuries increased by 6 percentage points, pushing net long positions to the highest level since May 20, while short positions decreased by 2 percentage points and neutral positions dropped by 4 percentage points.

As of June 11, CFTC data showed that asset managers remained optimistic, increasing net long positions in futures contracts for US Treasuries ranging from two-year to ultra-long term, equivalent to about 140,000 10-year Treasury futures contracts. At the same time, hedge funds reduced net short positions equivalent to approximately 95,000 10-year Treasury futures contracts.

Data released last week showed that US inflation in May fell more than expected, with core CPI dropping to a three-year low year-on-year, reversing market expectations for rate cuts. On Friday, the 10-year Treasury yield fell below 4.20% for the first time since April 1.

On Tuesday, soft US retail sales data further fueled expectations for rate cuts, causing US Treasury prices to rise and yields to drop, with the more interest rate-sensitive two-year Treasury yield falling by 5.98 basis points and the 10-year benchmark Treasury yield falling by 6 basis points.

With rising expectations for rate cuts, the market currently anticipates two 25-basis-point rate cuts in 2024, compared to the Fed officials' expectation of one.

The US deficit exceeding expectations released on Tuesday also failed to dampen the bullish sentiment for US Treasuries.

On June 18, US Eastern Time, the latest forecast released by the Congressional Budget Office (CBO) showed that the US budget deficit for this year is expected to reach $1.92 trillion, higher than the $1.69 trillion in 2023. The CBO's latest estimate is more than $400 billion higher than the February forecast, with an adjustment of up to 27%.

In terms of economic forecasts, the CBO stated that this year's economic growth will be faster and inflation will be higher. The CBO has pushed back the expected timing of rate cuts by the Fed to the first quarter of 2025, later than the mid-2024 previously predicted in February However, it is worth noting that the CBO's economic forecast was finalized in early May, prior to the latest meeting of the Federal Reserve