Traders Increase Bearish Bets on US Treasuries Despite Weaker Jobs Data

What happened

Traders extended their short bets against US government bonds. This move occurs as long-term yields hover near a 24-year high. The traders' decision signals an expectation that the selloff in these bonds, and consequently the rise in yields, is likely to continue. This is happening even after a sharp slowdown in job growth, which would typically point to a cooling economy.

Why it matters

The expansion of short bets on Treasuries, even in the face of weaker job data, is a significant signal that the market may be more focused on other factors pressuring yields. Historically, weak job data tends to ease inflation expectations and, consequently, pressures for Fed interest rate hikes, which would lead to a drop in bond yields. However, the persistence of these bets suggests that market participants may be pricing in risks such as more persistent inflation, growing fiscal deficits, or a 'hawkish' monetary policy for longer than expected. Long-term yields remaining near 24-year highs indicate an environment of elevated capital costs, with implications for corporate and government financing.

Market impact

• Interest rates and bonds: Long-term Treasury yields tend to rise further, reflecting expectations of continued selling. This could lead to increased borrowing costs for businesses and consumers, as well as capital losses for bondholders. The yield curve may steepen, with longer maturities rising more than shorter ones.
• Dollar and exchange rates: An increase in Treasury yields tends to strengthen the dollar, making US-denominated assets more attractive to global investors. This could pressure emerging market currencies, including the Brazilian real, which tends to depreciate against the dollar.
• Equities: Rising long-term bond yields tend to be negative for stock markets. This is because the cost of capital for companies increases, and the present value of future earnings is discounted at a higher rate, negatively impacting valuations, especially for growth companies. More indebted sectors or those reliant on financing tend to be more affected.
• Brazil: The scenario of rising Treasury yields and a strong dollar tends to be challenging for Brazil. Pressure on the real could lead the Central Bank to maintain the Selic rate at high levels for longer or to be more cautious in its interest rate cutting cycle to contain imported inflation and capital outflow. The Ibovespa may suffer from global risk aversion and the reduced attractiveness of emerging markets.

What to watch

Investors should closely monitor upcoming US inflation data (CPI and PPI), as well as subsequent employment reports (payroll). Comments from Federal Reserve members on monetary policy and the interest rate path will also be crucial. Furthermore, the evolution of fiscal discussions in the US Congress could influence expectations about bond supply and, consequently, yields.

Scenarios

Base Scenario: Long-term Treasury yields remain elevated or rise marginally, with the market pricing in more persistent inflation or a 'hawkish' Fed for longer, despite mixed economic signals. The dollar remains strong. Risk Scenario: A more significant deterioration in US economic data or a 'dovish' surprise from the Fed could reverse the bearish bets, leading to a drop in Treasury yields and a weakening dollar.

Original source: Bloomberg Markets. For information only, not investment advice.