US Treasuries

While some may interpret the March slide in Treasury prices as a sign of waning confidence in the US and one of the most prominent and enduring flight-to-quality instruments, additional forces are in play. Following the 9-point January through early March Treasury Bond rally, some measure of technical balancing was needed. However, significant historic supply changes are looming for the Treasury markets, which could eventually shut off an unending explosion of US debt instrument supply. On the other hand, anything associated with Washington, DC, will present significant twists and turns, with history suggesting major change is very unlikely and will take much longer than anticipated. Therefore, traders should separate near-term and long-term prospects in the Treasury markets, with the near-term presenting a bearish track while the long-term potentially creating a significant buying opportunity.

In our opinion, the early 2025 Treasury Bond rally was fueled by slowing fears and ideas that inflation would continue to come down, allowing the US Federal Reserve to cut interest rates. However, fears of economic headwinds flowing from the tariff war and sharp reductions in US government spending have had the surprising impact of sending Treasury prices higher and the US dollar higher. Indeed, traders may be liquidating Treasuries to avoid historic volatility from changes in how business has been done in Treasuries for decades. Treasury Bond open interest has fallen sharply; trading volume has dropped, and the latest net spec and fund long of 126,106 contracts is well below the February 18th high (the largest spec long since 2017), suggesting money is moving to the sidelines.

In the short term, June Bonds appear to be in a downtrend, perhaps due to bearish bond vigilantes who think “nothing will change in Washington.” We also believe negative views toward the US economy going into the March highs have not materialized, leading to traders selling Bonds due to the general resiliency of US economic data. On the other hand, the bearish track could be short-lived if tariff anxiety and Washington infighting reach a crescendo early in April. Remember that even financial markets are subject to classic supply and demand forces. From a technical perspective, the net spec and fund long leaves Treasury Bonds vulnerable to stop-loss selling, especially if prices trade below 115-20. While it might be considered premature and overly optimistic, a significant reduction in US refunding supply from less spending could drive Treasury prices sharply higher in the months ahead.

Past performance is not indicative of future results

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Originally Published March 28, 2025

This article originally appeared in the March 28, 2025 issue of our Weekly Market Letter. For information about our other products and services, visit https://hightowerreport.com.

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