How a ‘short squeeze’ could knock the 10-year Treasury yield down to 2%

Bond investors are now contemplating what it would take the Treasury market’s benchmark yield to 2%, a level not seen since the days following Donald Trump’s presidential election victory in 2016.

Besides the usual bugaboos of an economic downturn and a global trade war, Ed Al-Hussainy of Columbia Threadneedle said just the way market participants are set up in the bond-market may be enough to provide the impetus for the 10-year Treasury yield to breach the key psychological level.

“One of the catalysts that can move yields lower is the short-space capitulating,” Al-Hussainy, senior interest rates and currencies analyst for Columbia Threadneedle, told MarketWatch.

The 10-year Treasury yield TMUBMUSD10Y, -1.93% is trading at 2.159%, near its lowest since Sep. 2017, down more than 1 percentage point since the benchmark rate hit multiyear highs in November, Tradeweb data show. Shorter-dated maturities, sensitive to expectations for monetary policy, like the 2-year note yield TMUBMUSD02Y, -3.13% and the 5-year note TMUBMUSD05Y, -2.53%  have already pushed below 2% on Friday. Yields and bond prices move in opposite directions.

Yields continued their fall Friday after Trump’s threat to place tariffs on Mexican imports drove demand for assets, like government bonds, that are considered safe.

Al-Hussainy points out data from the Commodity Futures Trading Commission shows hedge funds and other speculators have increased their short positions — bets that Treasury prices will fall and yields will rise — since January in 10-year Treasury futures. The amount of bullish bets exceeding bearish ones among speculators stood at 423,351 contracts as of May 21, the biggest net short positioning in 10-year notes in around six months.

Outsize positions held by speculators are often viewed as potentially contrarian signals. In the case of a short squeeze, weak-handed speculators could be forced to buy back futures, accelerating a rally and

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