In an unexpected turn of events, Treasury bonds experienced their second-best week in 2023, following a bond market rally incited by smaller U.S. bond sales and unfavorable job data. With the Federal Reserve's decision to keep interest rates steady and a surprising slump in last month's employment growth, speculations of potential rate cuts in 2023 have been sparked among investors. This wave of speculation has significantly boosted the iShares 20+ Year Treasury Note ETF (NASDAQ: TLT), which recorded a gain of 3.9% over the past week.
Hedge funds reached record-high short positions on Treasuries before these expected developments. Leveraged funds also escalated their net short positions in Treasury futures to historic levels not seen since 2006, while cash bonds experienced a rally. Gareth Berry, a strategist at Macquarie Group (OTC:MQBKY) Ltd., interprets this as a sign of an impending market incident.
Prominent hedge fund investor Bill Ackman made a timely exit from his Treasury short positions due to concerns over deteriorating economic data and global risks associated with the Middle East conflict. Following Ackman's move, 10-year Treasury yields fell from 5% to 4.6%, and the U.S. Treasury 10-Year Note ETF (NYSE: UTEN) rallied by 3%.
Market-implied probabilities now suggest a rate cut as early as May 2024, with nearly a full percentage point of rate cuts expected for the next year, according to CME Group Inc. (NASDAQ:CME)'s Fedwatch tool. This development is largely driven by signs of softening in the US labor market, as evidenced by the decline in October Nonfarm payrolls.
Investors are now keenly focused on upcoming speeches by Federal Reserve officials, including Chair Jerome Powell at the Division of Research and Statistics Centennial Conference and the Jacques Polak Annual Research Conference. These events are set to provide further insights into the future direction of interest rates and the overall state of the U.S. economy.
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