Why Bond Market Speculators Cut Bullish Positions Last Week

US bond markets improved marginally last week

The US bond (BND) markets responded to the series of positive economic data releases from the US last week. An uptick in jobs accompanied by a 0.02% increase in wage rate improved the chances for a hawkish statement from the US FOMC on Wednesday. The US FOMC is widely expected to raise the target range by 0.25% to 1.25%–1.50%, leading to further gains in bond yields and a corresponding fall in bond prices.

The problem of a flattening yield curve could persist after the FOMC meeting, as the Fed is expected to reiterate its intention to raise interest rates another three times in 2018 and 2019. This could add upward pressure on short-term yields and leave the long-term rates unchanged.

Why Bond Market Speculators Cut Bullish Positions Last Week

Bond market performance and speculator positions

For the week ending December 8, the ten-year yield (IEF) rose to 2.4%. The two-year yield (SHY) closed at 1.8, up by three basis points. The longer-term 30-year yield (TLT) closed at 2.8, up by one basis point. Yield curve flattening continued in the previous week too but at a reduced pace.

As per the latest commitment of traders (or COT) report, released on December 8 by the Chicago Futures Trading Commission (or CFTC), speculator long positions fell sharply from 129,936 contracts to 14,345 contracts last week. This data was through Tuesday, which was before the positive jobs data came out.

The week ahead for the bond markets 

Activity in the bond markets could be volatile before and after the FOMC statement is released. Volatility could reduce after the event, as most of the expected hawkishness could have been priced into the bond (AGG) prices. Apart from the FOMC meeting, investors will closely watch inflation and retail sales. A further drop in the inflation rate could lead to the flattening of the yield curve.

In the next part of this series, we’ll look at the reasons behind the fall in the euro.