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Could Bonds Continue to Rally?

David Becker
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www.iforex.com
Could Bonds Continue to Rally?

The bond market has been on fire for the past few weeks but until this Friday there was not compelling evidence that short-covering was driving US Treasury prices. However, latest the Commitment of Traders for the 10-year Treasury note future a large adjustment to positions. The commitment of traders report reflects changes to future and options contracts and is released by the CFTC every Friday for the prior week ending Wednesday.

The shorts appeared to have capitulated, and covered a good chunk of their short positions. The gross short position was slashed by 131k contracts to 398.4k, which was the highest since before the financial crisis. The short covering was the largest since December 2012. The net short position fell to 19.1k contracts from 97.9k. At the same time, the longs took profits. The gross long position was cut by 52.1k contracts to 379.3k.

Looking forward, the Beige Book should continue to reflect bounce back in the economy following Q1 weakness. The last report from April 16 had already indicated that economic activity had increased in most Districts, though the expansion again was generally characterized as “modest” to “moderate.” Look for some further improvement in spending aided by improving Spring weather. There should be more signs of gains in the labor market given the ongoing pick up seen in various job indicators. Meanwhile, the housing sector could reveal some of the stagnation seen in various reports most of this year. This has been an area of increasing concern for policymakers. As for prices, they likely remained stable or moved slightly higher, as was the case reported in April. The ISM manufacturing report could be stronger than expected on the heels of Friday’s strong Chicago ISM report.

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