The Inflationary Penny Is Dropping

Speculators are rapidly increasing net short positions in Treasury futures as geopolitical tensions and persistent inflation risks drive yields higher. Despite a reduction in the basis trade, 10-year yields have risen 25 basis points this month, primarily driven by real yields.

Key Takeaways

• 1.Speculators are aggressively increasing net short positions in Treasury futures as inflation risks become harder to ignore.
• 2.The rise in Treasury yields is currently being driven more by real yields (approx. 60%) than by inflation expectations.
• 3.Despite some market assumptions, the increase in bond shorts is not due to the basis trade, which has actually been reducing recently.

Table of Contents

• Net Short Positioning in Bond Futures at Extremes
• Short Positioning in Bond Futures Has Been Rising
• Basis Trade Looks to Be Reducing

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