Bears bail out as 10-year Treasuries eye best week in a year

BOSTON/SINGAPORE: Benchmark 10-year US Treasury yields were close to their biggest weekly decline in a year on Friday as the market deemed a spike in inflation to be transitory, squeezing bears out of short positions.

The 10-year yield, which falls when prices rise, was down about a basis point at 1.4502% on Friday after touching as low as 1.428% earlier in the session, its lowest since early March. At that point, the yield had fallen roughly 13 basis points for the week so far, the steepest weekly drop since last June.

Traders said short-covering was driving the bond rally, in a market which remains the recipient of enormous Federal Reserve support, after US inflation data on Thursday was dismissed as insufficiently scary to prompt early tapering of stimulus.

TD Securities' Global Head of Rates Strategy Priya Misra said the pattern was triggered once the benchmark yield fell below 1.5%, the low end of its range in recent weeks, on June 9. That would have prompted an exit from many "steepener" trades and meant investors were buying longer-term debt since then, she said.

"I see this more as flow-driven trading rather than fundamentals," she said of Friday's patterns.

Year-on-year consumer prices did rise 5%, the biggest jump in nearly 13 years, but big contributions from price rises for airline tickets and used cars were seen as unsustainable and in keeping with the Fed's forecasts for a temporary spike.

"The market is short bonds, and has been trading that re-flation theme since last September," said Imre Speizer, a market strategist at Westpac in New Zealand.

"Traders have been holding on to old, stale positions and the market needs news to endorse those positions. This didn't endorse it, so more of those traders have just capitulated," he said.

Short positions in Treasuries had hit their highest since 2018, according to JP Morgan positioning data last week.

Their unwinding has flatted the yield curve to push the gap between policy-sensitive 2-year notes and 10-year notes as low as 128 basis points early in Friday's trading, its narrowest in three months. It was last at 131 basis points, two basis point higher than Thursday's close.

The gap between 5-year notes and 30-year bonds was at 142 basis points, less than a basis point higher than Thursday's close.

At the long end of the curve, the 30-year yield was at 2.1455% and touched as low as 2.122%, the lowest since late February.