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Hedge Funds and Large Speculator Positions: Week Ended February 2

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Part 4
Hedge Funds and Large Speculator Positions: Week Ended February 2 PART 4 OF 7

What’s the Reason behind Surging Bond Yields?

Bond yields higher amid increasing inflation expectations

The US bond market’s (BND) troubles escalated last week as inflation expectations continued to rise. There were multiple reasons for bond yields to spike. The first reason was the January FOMC (Federal Open Market Committee) meeting. The Fed left interest rates unchanged at that meeting but changed its outlook on inflation, saying that inflation (TIP) could pick up and stay near the 2% target. That was followed by comments from John Williams, president and chief executive officer of the Federal Reserve Bank of San Francisco, who said there could be three or four rate hikes in 2018. The nail in the coffin was the jobs data on Friday, February 2, which indicated that the US employment market is heating up, which could result in higher inflation and a hawkish Fed.

What&#8217;s the Reason behind Surging Bond Yields?

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 Bond market performance and speculator positions

For the week ended February 3, the ten-year yield (IEF) surged higher by 18 bps (basis points) to 2.86%, a level not seen since 2014. The two-year yield (SHY) closed at 2.14 (higher by 2 bps), and the longer term 30-year yield (TLT) closed above the crucial 3% level at 3.08% (higher by 17 bps). An increase in inflation expectations led to rises in longer-term yields.

According to the latest COT (Commitment of Traders) report released on February 2, 2018, by the CFTC (Chicago Futures Trading Commission), speculator long positions increased for a third consecutive week. The total net bearish positions as of Tuesday, January 30, 2018, increased by 97,000 contracts to 215,600 contracts compared to 117,877 contracts the week before. Such a steep increase in short positions, even before the key announcements last week, could mean that investors are expecting further declines in the bond markets (AGG).

The week ahead for bond markets

There are a few important economic data to be reported this week, but the key focus could remain on the ongoing spending bill in Congress. The deadline to extend the debt limit is February 8, and if a resolution isn’t found, there could be another government shutdown. That could result in an upward pressure on yields, which could have a continued negative impact on the equity markets.

In the next part of this series, we’ll look at the reasons behind the subdued performance of the euro last week.

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