LONDON (Reuters) – A potentially huge shift is underway in the U.S. bond market, underscored by a historic swing in hedge fund positions: investors are beginning to think the U.S. economy is close to peaking and the Fed is near the end of its rate-raising cycle.
Speculators on U.S. futures markets slashed their bearish bets on 10-year Treasuries last week by the largest amount since April 2017, and the third largest since the Commodity Futures Trading Commission began compiling data in 1995.
Move - Isolation - Economy - Stock - Markets
The move didn’t come in isolation. The global economy is stuttering, stock markets are wobbling and a growing number of Fed officials are signaling that the Fed could be closer to the end of its cycle than previously thought.
Money market pricing points to another rate hike next month – the ninth of the Fed’s tightening cycle – but only one more next year is fully discounted. As of September, Fed policymakers expected to need to increase rates three more times next year.
Analysts - Morgan - Stanley - Reckon - Year
Analysts at Morgan Stanley reckon that unless further tightening next year is accompanied by forward guidance for rate hikes beyond those outlined in the Fed’s “dot plots”, then 10-year yields “have indeed peaked for this hiking cycle.”
“We … believe U.S. rates have ended the cyclical bear market,” they wrote in a note last week.
Counterparts - Citi - Treasuries - Demand - Investors
Their counterparts at Citi are also bullish on Treasuries, citing safe-haven demand as investors shun crumbling credit and stock markets. “A short squeeze in Treasuries is likely and should fuel further gains near term,” they wrote in a note last week.
The 10-year yield reached 3.25 percent on Nov. 7, close to the 3.2610 percent peak on October 9, a high not seen since April 2011. But it has fallen almost 20 basis points since, opening up the possibility of a move back below...
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