While I expect T-bill yields to remain low for an extended period amid limited growth and low inflaiton, the current levels will not prove sustainable into 2010 as the window-dressing goes into reverse.
However, while I regard the short-end of the US curve as too expensive, I still maintain my overall bond market bullish view as I look for lower long-end yields. On average, fundamental data has been surprising rather on the negative side as of late. Furthermore, while a week ago the technical picture appeared neutral, some bullish signals have been emitted in the meantime. First, the Bund future - while still trading below its early October high at 123.04 - has moved above the interim high reached on November 2 at 122.44. However, as cash bond yields remain stuck in their 3.20-3.40% range with 10y currently at 3.28% (and also the previous benchmark at 3.23%), the bullish signal is a weak one. In the US, the situation is similar. 10y futures have traded above their early October high of 119-29 on an intra-day basis, reaching 129-31+ on Friday before falling back. But in yield terms, the 3.30% level could once again not be broken and continues to serve as an important support area. Therefore, technically 10y bond futures look rather bullish, but yields remain in a neutral zone and the overall picture is neutral-to-bullish.
Positioning remains market supportive as short positions in US bond futures according to CFTC data increased even though they remain far from extreme. More importantly, the curve exposure rose ever higher amid larger longs in the 2y/5y segment and more pronounced shorts in the 10y/30y area. The current curve exposure (I used a pvbp-weighted measure, for further details refer to Beware of the Steepener dated November 16) is close to the all-time record and was only surpassed in between end September and end October last year (see chart below).
Curve exposure increased even further: warning signal for steepeners