Consensus remains heavily in favour of higher yields while positioning is reflecting this bias as net shorts in US bond futures have barely receded in the week up to Jan 19 (this data is always released with a one-week delay). As the chart below shows, the current level of shorts (I use the aggregate net positioning in the 2y, 5y 10y and 30y futures weighted according to their pvbp and is expressed in USD mln per bp), has over the past years always been followed by a (temporary) move lower in yields, irrespective of the medium-term trend.
Net short positioning remains at extreme levels (2y, 5y, 10y and 30y futures)Rates Strategy: Here Comes the Weatherman dated Jan 12), the weather of the previous month (in the current case December) serves as a good indicator for the direction of bond yields during the next month (i.e. January). Colder (warmer) weather than usual during winter months is on average followed by a move lower (higher) in yields. The reason is most likely that colder-than-usual weather is a negative for the economy in the short-term (it negatively affects construction, retail sales and can also - especially if there are severe winter storms - affect industrial production. The only positive comes from utility output as well as the sale of winter gear). Not only has December been colder than is generally the case in the US as well as in large parts of Europe, January has also seen cold temperatures coupled with heavy snowfalls.
By now this has started to affect economic data releases and the Citigroup surprise indices for the Eurozone and the US have both moved into slight negative territory (i.e. there were more negative economic data surprises in the recent past than positive ones). January is the first month since April last year where both the USD and the EUR surprise index are both in negative territory at the same time.
Eurozone and US economic surprise indices are both in negative territory
CRB index has finally broken its multi-months upward trend
On the downside for bond markets is that near-term stochastic indicators are starting to look overbought. Furthermore, Greece is offering a syndicated deal this week. Should this sale go well, it could ease the risk of a near-term funding crisis and with that help spread products in general at the expense of Bunds.
Still, I think the positives outweigh these negatives at present and I therefore maintain my tactical bullish outlook for UST and Bunds.