Bank of America said market positioning now favors short-term Treasuries over long-dated securities, leaving the Treasury yield curve biased to steepen.
The bank reported that both fund inflows and asset manager allocations moved toward the front end of the curve after the July Federal Open Market Committee meeting. Its proxy for futures positioning has evolved from indicating a broad selloff in Treasuries to one that is oriented around the shape of the curve.
In the bank's assessment, active bond funds turned sharply underweight in duration following the July FOMC decision. That underweight stance, Bank of America said, creates scope for managers to add duration or other risk if incoming inflation readings reduce concerns about more aggressive rate paths.
At the same time, Commodity Trading Advisors remain heavily positioned short, particularly at the front end of the curve. The bank noted that momentum indicators for CTAs have not yet flipped, leaving those short positions intact for now.
Bank of America emphasized the importance of this week’s inflation figures for front-end short positions. The bank’s U.S. economics group projects core Consumer Price Index (CPI) to come in at 0.20% month-over-month for July. According to the bank, that outcome would leave expectations for a September rate move unresolved unless other details point to stronger Personal Consumption Expenditures inflation.
If the CPI reading does not support a September rate increase, Bank of America warned that the crowded bearish positioning could face pressure. The combination cited by the bank - large CTA short exposure together with underweight active fund allocations - would make front-end shorts particularly vulnerable to an inflation print that reduces the odds of a rate hike.
In summary, the bank views the current market configuration as tilted toward a steeper Treasury curve, with upcoming inflation data acting as a potential catalyst for shifts in positioning at the short end.
Note: The article reflects the bank's commentary on positioning and the role of near-term inflation data in shaping rate expectations.