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Bond traders are going all-in on the big short bet of the US Treasury market

(Bloomberg) – The fate of short sellers is not just a central issue for meme stocks. Short bets are increasingly trending in the $ 21 trillion government bond market, which has a critical impact on all asset classes. The 10-year benchmark return hit 1.62% on Friday – its highest level since February 2020 – before dip-buying from overseas investors surfaced. The stronger than expected job creation and the apparent lack of concern of Federal Reserve Chairman Jerome Powell for the time being about the rise in long-term borrowing costs have encouraged traders. In a tell-tale sign of which way they’re leaning, the demand for 10-year debt in the repurchase market is so great that interest rates have gone negative, which is likely part of an endeavor to shorten the maturity of the ultra-light Monetary policy and an accelerated vaccination campaign are helping to bring a post-pandemic reality into focus. The bearish bond scenario is of course risky. Most importantly, yields could rise to the point where they scared stocks and tighten financial conditions in general – a key metric the Fed is focusing on in guiding policy. Even so, Wall Street analysts don’t seem to be raising their year-end yield forecasts fast enough. “A lot of tinder is now being set on fire for higher returns,” said Margaret Kerins, global head of fixed income strategy at BMO Capital Markets. “The question is, why are higher returns too high and really put pressure on risk-weighted assets and put Powell into action” to contain them. Stock prices have already shown signs of vulnerability to rising returns, particularly for tech-intensive holdings. Another area at risk is the real estate market – a ray of hope for the economy – with rising mortgage rates. The surge in yields and growing confidence in the economic recovery prompted a number of analysts to recalibrate expectations for 10-year interest rates last week. For example, TD Securities and Societe Generale have raised their year-end forecasts from 1.45% and 1.50%, respectively, to 2%. Trade commission data shows. Auction pressure in the coming days, however, BMO sees 1.75% as the next key mark, a level , which was last seen in January 2020, weeks before the pandemic sent the markets into a chaotic frenzy. A New Dose of Long-End Next week’s supply could make short positions even more attractive, especially after record-low demand after the 7-year auction last month triggered the 10-year yields above 1, 6% to press. The Treasury Department will sell a total of $ 62 billion in 10- and 30-year debt. Given the expected inflation and growth expectations, traders are signaling that they anticipate the Fed may have to react faster than advertised. The Eurodollar futures are now reflecting a quarter point hike in the first quarter of 2023, but they are starting to suspect that it could come in late 2022. Fed officials have forecast they would keep rates near zero through at least the end of 2023. As the market leans toward higher returns, the bond-equity interplay will certainly be a big focus going forward: “There’s definitely this dynamic, but the question is how well risky assets adapt to the new paradigm,” Subadra said Rajappa, Head of US Interest Rate Strategy at Societe Generale. “We’ll be watching next week how the dust settles after the salary data, how government bonds react, and how risky assets react to the surge in yields.” What to Watch Out for The Economic Calendar March 8th: Wholesale Sales / Inventories March 9th: NFIB- Small Business OptimismMarch 10: MBA Mortgage Applications; CPI; average weekly income; monthly budget statement March 11: unemployment claims; Long consumer convenience; JOLTS vacancies: Change in budget in assets March 12: PPI; Mood at the University of Michigan: The Fed calendar is blank ahead of the March 17th policy decision. The auction calendar: March 8: 13-, 26-week bills; March 9: 42-day cash management bills; 3-year notes March 10: 10-year notes March 11: 4, 8-week bills; For more articles like this, please visit us at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP