How Did Smart Money Position Last Week?

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Part 4
How Did Smart Money Position Last Week? PART 4 OF 7

Why Bond Yields Have Surged

Bond yields continue to cause pain

US bond markets continued to reel, ending with minor losses last week. Bond yields remained close to their recent highs. The bipartisan agreement that ended the US government shutdown could end up increasing the US budget deficit, which is negative for bonds. Increasing the budget deficit could boost investors’ yield demand, especially in long-term Treasuries. The Vanguard Total Bond Market ETF (BND), which tracks bond markets, ended last week at 79.6, posting its sixth week of loss in the last eight weeks.

Why Bond Yields Have Surged

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Bond market performance and speculator positions

In the week ended February 9, the ten-year yield (IEF) remained close to its multimonth high, at 2.9%. The two-year yield (SHY) closed at 2.1 (down by seven basis points), and the longer term 30-year yield (TLT) closed at 3.2% (up by eight basis points). The expected increase in the US deficit, which could lead to higher inflation and eventually a rate hike, drove long-term yields higher.

According to the Chicago Futures Trading Commission Commitment of Traders report, speculators’ short positions increased for a fourth consecutive week. On February 6, net bearish positions rose by 111,940 contracts, from 215,600 contracts to 327,540 contracts. This steep increase in short positions by large traders could mean that traders expect bond markets to fall further in the future.

The week ahead for bond markets

Bond and equity market traders have been waiting for the US inflation report. A faster-than-expected increase in inflation, which could force the Fed to increase interest rates, was the key reason behind the current market fall. January inflation (TIP) is expected to be 0.2% month-over-month and 1.7% year-over-year. Any positive surprise could mean trouble for US bond markets.


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