FOMC minutes and Treasury auctions test one of the market's biggest short positions
Later today, the FOMC minutes and this week's Treasury auctions could test whether elevated yields are enough to pull institutional buyers back into US government bonds.
Market Analyst
FOMC minutes and Treasury auctions put bonds in focus
The Federal Open Market Committee (FOMC) minutes due later today could become an important test for the US bond market. They relate to the meeting at which Kevin Warsh made his debut as Fed chair with a clearly hawkish message and a forceful warning that inflation has remained above the 2% target for too long.
That message pushed the whole US rates curve back towards technically important levels, with the 10-year Treasury yield around 4.50% and the 30-year yield around 5.00% in the source article's market snapshot.
US yield curve, current and before the June FOMC
Sources: TradingView, Luis Ruiz
Institutional investors are looking at bonds again
With US yields back at elevated levels, this week's Treasury auctions are likely to attract close attention. The US Treasury is due to sell 10-year notes today and 30-year bonds tomorrow.
Recent auctions at similar yield levels have shown solid demand. Bid-to-cover ratios have remained above average, while participation from institutional and foreign investors has stayed high, reducing the need for primary dealers to absorb excess supply.
In other words, current interest-rate levels appear to be renewing appetite for US government debt among larger investors.
Institutions are buying while speculators stay short
Market sentiment towards bonds remains clearly negative, however. The latest ZEW survey showed that only 4.8% of participants expect short-term US interest rates to ease, while just 6.9% expect lower long-term bond yields.
That view is also visible in derivatives markets. Leveraged funds, the investor category with the strongest speculative component, are holding one of their largest net short positions of the year across futures and options, equivalent to more than 30% of open interest in 10-year note futures.
US 10-year Treasury note futures, weekly chart, and leveraged funds net positioning
Sources: TradingView, Luis Ruiz
How markets could react
If the minutes show a Fed that is less worried about inflation, and the auctions once again draw solid demand, the bond market could attempt a rebound. That move could be amplified if leveraged funds start closing short positions.
By contrast, if the minutes reinforce the Fed's restrictive bias and the auctions disappoint, bonds could come under renewed pressure. That would favour another rise in yields and delay any clearer trend change.
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