To be sure, my fundamental outlook has not changed and I still see very little upcoming inflation pressures. Yes, headline inflation rates will rise over the next months as the base-effects from the previous commodity sell-off into early this year fades. However, core inflation rates should continue to slowly fall further amid the high level of unused capacity (aka the output gap) as well as a credit creation process which is far from working properly. Still, if markets chose to refocus again on the risk of rising inflation, bonds will weaken.
Unfortunately also the latest positioning data raise the propability for lower government bond prices. Last week's JP Morgan investor sentiment survey showed a marked surge of net-longs to 15% from 1% the previous week, a multi-month high. Additionally, pvbp-weighted non-commercial positions in US bond futures (2y, 5y, 10y & 30y) for the first time since late 2008 have moved back to neutral. Non-commercials hold essentially a steepener with longs in 2y&5y vs. shorts in 10y&30y. This short position at the long end of the curve (10y&30y), though, is the smallest since January (i.e. around the time the 10y yield hit its record low). As a consequence, the short-covering by non-commercial accounts promises to be over while the net-longs according to the JPM survey suggests as well that there is little near-term buying in store.
Nr. of net contracts by non-commercials in US 10y futures: Short-covering is over