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5-year US Government Bonds:

“.. prepared to maintain the current target range for the federal funds rate for as long as appropriate,”

Source: Federal Reserve Chair Powell, 17th May 2024, Economic Outlook Speech

US 5 year government bonds have been selling off throughout most of 2024, as the yield has backed up from 3.84% at the start of the year to 4.53% (latest close). In part driving that, market participants have priced out multiple rate cuts from the curve as the Federal Reserve has maintained a hawkish stance, and emphasised the need to combat persistent inflation. Recent comments from Fed officials illustrate that (see above). As such, markets are now pricing the first full cut at the end of the year.

Over the past few weeks, though, the Citigroup Economic Surprise Index, a measure of economic data relative to expectations (for the US economy), has turned negative. That highlights how recent economic reports have (significantly) underperformed market expectations (fig 2). Despite that, yields backed up again last week.

From a positioning perspective, 5-year Treasuries are now heavily net SHORT (1.06mn contracts net SHORT), reflecting significant bearishness towards this part of the Treasury curve (as well as other parts - fig 1). An overbought/oversold model for 5 year Treasuries (i.e. an RSI, using both a 56 and 14 day timeframe) shows that the price is close to oversold at current levels (albeit there remains some modest potential for further price declines) - see fig 3. The key point here, though, is that a major rally in government bonds is likely brewing, given such one way positioning. As always, it will be crucial to closely monitor the evolution of the Fed’s commentary, as well as key inflation data points and the overall economic landscape for timing entry into that trade.

Fig 1: US 5-year bonds net speculative positions vs. US 5-year bonds futures

Fig 2: US 5-year bonds futures vs. Citigroup Economic Surprise Index

Fig 3: Medium term RSI scoring system vs. US 5-year bonds futures


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