The US bond market faces a test of inflation data, with traders betting that the upward trend will continue
The US bond market faces a test of inflation data, with traders betting on a significant rise in the bond market. Recent market turmoil has triggered risk aversion, fearing that a softening economy may force the Fed to cut interest rates. A survey by Morgan Stanley shows that client net long positions have reached recent highs. The US July CPI data is expected to support the bond market. The market has priced in a 25 basis point rate cut by the Fed in September, with some betting on a 50 basis point cut. Options skewness indicates that traders expect a possible rebound in the bond market
According to the Wise Finance APP, bond traders who have recently experienced sharp market volatility are betting that the bond market will rise significantly after the release of the US July CPI data on Wednesday. Last week, US bond prices rose sharply due to broader market turmoil triggering risk aversion sentiment, and increasing concerns about a possible economic slowdown that could force the Federal Reserve to cut interest rates significantly. Citigroup strategist David Bieber stated that even after traders unwound some extreme bullish positions, the market sentiment remains firm, "still long on bonds tactically and structurally."
In the past two trading days, the number of open positions for certain tenors (the amount of risk assumed by futures traders) has started to rise, consistent with the emergence of new long positions in the US bond yield curve after a period of aggressive liquidation. Meanwhile, in the spot market, a US bond client survey released by JP Morgan on Tuesday showed that client net long positions reached their highest level since December last year.
On Tuesday, US bonds rose across the board. Previously released data showed that US July PPI data was lower than expected, further proving that inflation is under control, enough to allow the Federal Reserve to begin easing monetary policy in September. The US July CPI data to be released on Wednesday is expected to provide further support.
Matt Luzzetti, Chief US Economist at Deutsche Bank, said after the release of the US July PPI data: "The market is leaning extremely dovish, expecting soft inflation data, which will allow the Federal Reserve to start cutting interest rates." The market is now fully pricing in a 25 basis point rate cut by the Federal Reserve in September, with some also betting that the Fed will cut rates by 50 basis points at that time.
In the US Treasury options market, similar to the futures market, traders have retreated from extreme positions, although the positioning indicates that expectations for lower US bond yields have not changed. Based on the so-called option skew, traders are betting that the bond market is more likely to experience a larger rebound in the coming days than a decline x-oss-process=image/format,jpg/quality,Q_90)