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Bond bears risk further shake-out

Even the most ardent advocates of higher rates are questioning whether the U.S. Treasuries market moved too swiftly in pricing in prospects of quicker growth and inflation.

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Bond bears, beware – the risk is building that Treasury yields go even lower.

With yields across maturities reaching the lowest levels since November, and in some cases breaching key technical marks, traders are abandoning bets on higher interest rates. Hedge funds and other large speculators reduced net-short positions in five-year note futures by about 86,000 contracts in the week through April 11, although more than double that amount of net shorts remain, the latest U.S. Commodity Futures Trading Commission data show.

The trend shows even the most ardent advocates of higher rates are questioning whether the U.S. Treasuries market moved too swiftly in pricing in prospects of quicker growth and inflation. In the latest round of covering, speculators pared shorts to the lowest since the U.S. election.

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While the analysts still expect the U.S. Federal Reserve to hike rates twice more this year, weaker U.S. economic data and international tension involving Russia and North Korea leave them seeing better opportunities to resume the wager in coming weeks.

JPMorgan Chase & Co.'s weekly client survey for the period ended April 17 showed a decline among all managers in short Treasury positions, matching the lowest level since the election.

For bond bears, there may still be room for a further shake-out. Speculators modestly increased their short position in 10-year Treasury futures and ultralong contracts, CFTC data through April 11 show.

On Tuesday, the 10-year Treasury yield fell as low as 2.163 per cent, breaking through the 50-per-cent Fibonacci retracement level since the election – 2.1769 per cent. The yield rose to 2.205 on Wednesday.

"We have yet to see a full capitulation of the short Treasuries Trump trade," BMO Nesbitt Burns strategists wrote in a note earlier this week.

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