(Bloomberg) -- Futures traders are shaking up their bets in the Treasury market after benign inflation data and dovish comments from a Federal Reserve official.
Most Read from Bloomberg
-
NYC Commuters Get New Way to Dodge Traffic: $95 Helicopter Rides
-
Scaramucci, Ackman Donate to Whitney Tilson’s NYC Mayoral Run
Changes over the past two days in open interest — the number of contracts in which futures traders have positions — are consistent with exits from short positions in two-year notes and new longs further out — particularly in five-year Treasuries.
The shift comes after a one-two punch of consumer price inflation data released Wednesday that showed core prices rose in December less than economists estimated, and Federal Reserve Governor Christopher Waller’s remarks the next day that officials could cut rates again by mid-year if the trend continues.
Bond investors at Franklin Templeton “still think a few Fed rate cuts are left” and have extended their rate exposure to around five years, chief investment officer Ed Perks said. Yields “are near the upper band of where they likely trade,” he said.
The recent changes in open interest, as tracked in CME Group Inc. data, show a steep drop in two-year note and increases in the five- and 10-year note contracts. For the two-year, the drop was worth about $3.6 million per basis point in risk, equal to around $20 billion of underlying securities. The increase in the five year was the biggest for the March contract since it acquired front-month status in November.
Interest-rate strategists at Morgan Stanley late Thursday recommended setting long positions in the tenor in anticipation of a Fed rate cut in March, which remains a minority view. The swaps market prices in just six basis points of easing for March, or about 25% odds of a quarter-point move.
While Treasuries were mostly little changed on Friday, the bond market rally over the past two sessions was led by the intermediate sector of the curve. The five-year’s outperformance of the two- and 30-year sectors was the strongest in more than a year.
Rate-cut expectations meanwhile rebounded from the setback caused last week by strong December jobs data. Fed officials’ next rate decision is on Jan. 29, and a communications blackout period begins Saturday, Jan. 18.
“We have not ruled out a March cut, but we do think that it’s more of a tail risk,” said Stephanie Larosiliere, head of fixed income business strategy at Invesco. “It doesn’t feel like the Fed has to react in such an urgent manner.”