On what Trump’s first working day as POTUS, I had the privilege to be on Bloomberg’s Daybreak to talk about the wagers on US interest rates in the futures market. In the most recent CFTC reporting week, which ended on January 17, speculators in the 10-year note futures market reduced the record net short position. It is only the second week reduction since the end of November.
Anchor Alix Steel noted that while the hedge funds are extending shorts, real money has been buying. That data may be dated. Recall that on January 17, the US 10-year yield fell to 2.30%, the lowest level since the end of November. However, the combination of strong data, comments by Yellen, and anticipation of deregulation, tax cuts, and infrastructure spending weighed on bonds prices and yields bounced more than 20 bp off the lows in the following three sessions.
The issue also arose in the discussion that “American First” rhetoric may not encourage foreign investors to buy US bonds to help fund the current account deficit. China has been selling Treasuries as has Japan. Given that the private sector has bought from the central banks, it is not so worrisome, I think, at this juncture. Moreover, Treasuries are accumulated by central bank as they resisted the upward pressure on their currencies.
Even during the Obama Administration, there was a sense that the US Treasury would prefer that central banks don’t buy US Treasuries so much and let their currencies appreciate and help address the trade imbalances. Further out, it may be a more important issue, though if Trump’s policies result in a small current account deficit, there will be less need for the capital inflows to fund it.
Click here for the nearly 4.5 minute Cool Video.