Futures traders change strategies in the Treasury market after moderate inflation data

Futures traders on the Treasury market are reconsidering their strategies after new inflation data revealed moderate price dynamics and a Federal Reserve representative also sent reassuring signals. Recent changes in open positions indicate an exit from short positions in two-year bonds and new long positions in five-year Treasuries. This shift follows inflation data showing a lower-than-expected price increase. Additionally, Federal Reserve Governor Christopher Waller commented that rate cuts by mid-year could be possible if the trend continues. At Franklin Templeton, a major bond investor, there remains an expectation of further Fed rate cuts, stated Chief Investment Officer Ed Perks. Data from the CME Group indicate a significant decrease in two-year notes and increases in five- and ten-year contracts. The decline in the two-year notes amounts to about $3.6 million per basis point, equivalent to a volume of around $20 billion in underlying securities. The increase in five-year contracts was the largest for the March contract since November. On Thursday, Morgan Stanley advised investors to bet on a possible Fed rate cut scenario in March, even if this remains a minority opinion. The swaps market prices in only a 25% probability of a quarter-point rate cut. Recent movements in Treasury prices have been primarily driven by the mid-term maturities, with the five-year segment standing out compared to the two- and 30-year bonds. Expectations for rate cuts have recovered since the recent positive labor market data in December, but the Fed meeting on January 29 is eagerly awaited, while a communication blackout begins shortly before. Stephanie Larosiliere from Invesco emphasizes, however, that despite the discussion of a March rate cut, nothing is decided yet and the Fed is unlikely to feel immediate pressure to act.