Traders Cut $7 Billion of Treasury Bets Before Inflation Report

Treasuries traders are taking bets off the table ahead of key U.S. inflation numbers, with benchmark yields breaking their recent trading range in a shakeout of short positions.

Yields steadied Thursday after slumping this week to close at the lowest since March. The moves come as a measure of positioning showed traders unwound the equivalent of almost $7 billion in 10-year cash bonds Wednesday, a sign the market may be willing to look past the prospect of a higher-than-expected reading.

Traders Cut $7 Billion of Treasury Bets Before Inflation Report

Markets have become fixated on the durability of inflation as the global economic recovery continues to gain traction, as it could add to the case for the Federal Reserve to start discussions on withdrawing stimulus. U.S. data Thursday is expected to show annual prices climbed in May by 4.7%, the most since 2008 and building on a jump the previous month.

Bond positions were near their shortest since September 2018, according to JP Morgan Chase & Co.’s latest Treasury Client Survey taken on Monday. Traders appear to have cut back since then, with preliminary open interest in 10-year bond futures -- a measure of outstanding positioning -- slumping by over 75,000 contracts on Wednesday.

“We’re seeing a covering of short positions and the market also appears to have really bought the dovish, patient line the Fed has been pushing on inflation,” Nomura Holdings Inc. strategist Andrew Ticehurst wrote in a note.

Benchmark U.S. Treasury yields edged higher to 1.50% on the day, in line with German bonds, after having slid eight basis points in the past two days. Yields across Europe and Asia have also reset lower, with Australia’s 10-year yield dropping eight points to fall back below 1.50% on Thursday.

“Without a fundamental catalyst, we think the declines in yields over the last couple of sessions have been driven largely by technicals, especially given the breadth of short duration positioning,” JPMorgan strategists including Jay Barry wrote in a note.

Ten-year bond yields in the U.S. and Australia may fall to 1% as investors gradually embrace the view that price pressures are transitory and unlikely to stay elevated in the medium to long term, said Hidehiro Joke, a senior bond strategist at Mizuho Securities Co.

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