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US Treasuries: More Upside Ahead?

Signs of weakness in the US economy have been building in recent weeks and months. Last week was a case in point. The ISM manufacturing report was disappointing; Wednesday’s ADP employment and ISM services were both weaker than expected; and, while Friday’s payrolls beat expectations (by 16k), there were significant downward revisions in May (-54k) and April (-57k). Of note the unemployment rate for June ticked higher (by more than expected: 4.1% vs. consensus of 4.0%). 

Linked to that, the US 10 year Treasury yield has been trending lower (i.e. making lower highs and lower lows since late April). Last Friday it closed below its 200 day moving average and at around its highs from 2022 (i.e. at 4.28%, see FIG 1). The key question, therefore, is: Will the evidence for a ‘soft patch’ in the US economy continue to build? Or is this theme mostly (if not fully) priced in? Put another way: How much more headroom is there in this bond market (i.e. for a rally in Treasury prices)?

From a models’ and positioning perspective, there’s potential for further upside in coming weeks. In particular, US Treasuries are not yet technically over-bought (albeit they are getting close, see FIG 2); measured sentiment readings are broadly mid-range; and net speculative positioning is NEUTRAL* (see FIG 3). All eyes, therefore, will be on this week’s US CPI June data release (due Thursday).

FIG 1: US 10 year Treasury yield (%) shown with 50 & 200 day moving averages


*Albeit positioning has been distorted by the ‘basis trade’. That is, Treasury futures pricing has been ‘too high’, given the yield offered on cash Treasuries. Hedge funds/traders have therefore bought cash Treasuries and sold futures. That arbitrage activity has distorted the positioning data which has become somewhat unhelpful.

FIG 2: Longview medium term technical scoring system vs. US 10y futures



FIG 3: 10 year USTs net speculative LONG/SHORT positions




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