U.S. Yields—Investors positioned for higher rates

U.S. equities look set to end the week in downbeat fashion with stocks falling out of the gate at least in early trading. The S&P 500 index, however, came within 0.5% of setting off a new record high, while extended weakness for tech names pushed the Nasdaq composite index to 5.3% below its 14-year high. Some of the positive tone causing equities to extend higher was caused by a perceived lessening of tension between Russian premier Putin and his Ukrainian counterparts.

Janet Yellen’s two-day testimony to Congress also offered an encouraging view on the economy despite highlighting a slowdown in the housing market. Demand for bonds at government auction this week was mixed, with a good turnout for the 10-year issue but not so strong for the long bond. As a result the yield curve steepened by a few basis points between those maturities while the more sanguine outlook for policy from Yellen helped shave around 5bps off the sensitive two-year note throughout the week.

Like a dog that won’t stop barking at the mailman, fixed income investors continue to brace for higher rates in spite of the words of the Fed chief and price action in the bond world. Recently we pointed to the Chicago-traded Eurodollar futures market where a record number of net short positions had been building. In subsequent weeks, more investors have joined the bearish posturing while others have added to established positions betting that the U.S. yield curve must bite back when the Fed inevitably moves.


 

Open interest in December 2015 Eurodollar future


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