Shift in Treasury Bond Positioning Reflects Growing Confidence in Economic Growth

Shift in Treasury Bond Positioning Reflects Growing Confidence in Economic Growth 

Positioning in US Treasury bonds is shifting towards shorter positions due to the increasing possibility of higher yields persisting, driven by a robust US and global economy.

Recent data validate earlier forecasts of an upturn in the US and global economic cycle. The March ISM report, released on Monday, indicates that the index has returned to expansion territory, aligning with trends seen in the manufacturing PMI.

The US manufacturing ISM not only serves as a reliable indicator of US economic growth but also offers valuable insights into global economic trends due to the sector's significant impact on the world economy.

Short-term leading indicators, such as the new orders-to-inventory ratio, suggest a positive trajectory for the ISM. Furthermore, longer-leading data, like the Global Financial Tightness Indicator (GFTI), indicate that the recent slip in the ISM was likely temporary. The GFTI, which reflects global central bank rates, has been increasing since last summer, anticipating the current upturn in the ISM.

Bond investors seem to be interpreting this data as indicating minimal recession risk and potentially higher inflation risk. Consequently, there has been a consistent decrease in long positions in US Treasuries, as indicated by futures data.

Ten-year bond yields have been steadily climbing, primarily driven by real yields, suggesting that the market perceives the current situation as a growth-oriented scenario.

The upcoming payroll report on Friday might provide further insight, although any signs of slowing in the job market are unlikely to significantly impact the overall positive outlook for US and global growth, and the accompanying increase in inflationary pressures.