The trading of US bonds that leaned long in the past week has rebounded significantly. According to a JPMorgan bond customer survey, in the week ended June 17th, the long position of US bonds rose by 6 percentage points, pushing the net long position to the highest level since May 20th. The overnight weaker retail data further fueled the rise in US bond prices and diving yields.
The cooling inflation in the United States has reignited market rate cut expectations. The overnight weak retail data further fueled the bullish sentiment of US bonds, overshadowing concerns about the US fiscal deficit.
In the past week, trading in US bonds has rebounded significantly. A Morgan Stanley bond client survey showed that within a week ending June 17th, bullish positions in US bonds increased by 6 percentage points, raising the net long positions to the highest level since May 20th, while short positions decreased by 2 percentage points and neutral positions decreased by 4 percentage points.
As of June 11th, CFTC data showed that asset managers were optimistic, adding net long positions in US bond futures from 2-year to ultra-long term, with an increase equivalent to about 140,000 units of 10-year US bond futures equivalents. Meanwhile, hedge funds lifted net short positions by approximately the equivalent of 95,000 units of 10-year US bond futures.
Last week's data showed that US May inflation fell more than expected, with core CPI falling to a three-year low, reversing market expectations of a rate cut. On Friday, the 10-year Treasury yield fell below 4.20% for the first time since April 1st.
On Tuesday, weak US retail sales data further ignited expectations of a rate cut. US bond prices rose, yields fell sharply, and the more rate-sensitive 2-year US bond yield fell by 5.98 basis points, while the benchmark 10-year Treasury yield fell by 6 basis points.
Rate cut expectations are rising. Currently, the market predicts two 25 basis point rate cuts in 2024, compared to Fed officials' expectation of only one.
The US deficit, which was well above expectations, did not dampen the market's bullish sentiment for US bonds on Tuesday.
The latest forecast released by the Congressional Budget Office (CBO) on June 18th shows that the US budget deficit this year is expected to reach $1.92 trillion, higher than $1.69 trillion in 2023. The latest estimate by the CBO is more than $400 billion higher than the February forecast, an adjustment of up to 27%.
In terms of economic forecasts, CBO pointed out that economic growth will be faster and inflation will be higher this year. CBO also postponed the expected time for the Fed's rate cut to the first quarter of 2025, later than the mid-2024 predicted in February. However, it is worth noting that CBO's economic forecast was finalized in early May, earlier than the latest meeting of the Fed.