(Bloomberg) — Mounting anxieties about inflation risks and the central bank’s likely policy response are taking a toll on the use of U.S. Treasury futures.
With uncertainty swirling about which way Treasury yields might ultimately go, some traders are apparently taking their chips off the table and the size of outstanding positions in futures is shrinking. That shift has taken place even as yields get tossed up and down within their range, spurred higher by stronger-than-expected inflation figures and a soft auction one day, and weighed down by soothing words from the Federal Reserve boss the next.
Open interest in September 2021 10-year note futures on Tuesday fell 1.3% to 4.15 million, the lowest in its life as the front-month contract. The 53,000-contract decline was equivalent to around $5 billion of the current 10-year note, of which there’s $117 billion outstanding. The number of 10-year futures contracts in use has fallen by 266,165 from its June 16 peak, a decline worth $22.3 million in risk per basis-point move in yield.
The consumer price report further undermined confidence in the Federal Reserve’s position that the inflation trend is unlikely to be sustained and doesn’t yet warrant a monetary policy response.
Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly reiterated that view after the data, while Federal Reserve Chair Jerome Powell said in congressional testimony Wednesday that “reaching the standard of ‘substantial further progress’ is still a ways off” and that it would be a mistake to act prematurely against inflation.
The yield on benchmark 10-year Treasury notes fell as much as seven basis points to 1.35% Wednesday, with the rate hitting lows for the day after Powell responded to lawmaker questions, and the curve flattened.
Meanwhile Larry Fink, chief executive officer of BlackRock Inc., said inflation won’t be transitory, and announced a blanket raise for employees.
The pullback in usage for the 10-year futures contract has an analog in the cash market, where JPMorgan Chase & Co.’s latest weekly Treasury client survey found a retreat from net short positioning. The share of respondents positioned neutral was the highest since early May.
(Updates throughout.)
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