More than 33 percent of investors surveyed said they were neutral on rates, with net-long positions outnumbering net- shorts by 2 percentage points, according to Citigroup. This compared with the February survey, in which short positions exceeded longs by 13 percentage points. A short is a bet an asset will decline in value, while a long is a bet it will increase.
“What is most surprising is how undecided the market is,” Neela Gollapudi, a strategist at Citigroup Global Markets in New York, said in a telephone interview. “Based on the prior few days’ moves before the survey, you would have thought people would have more conviction. It shows the market is confused.” The survey was administered March 19-22.
The yield on the benchmark 10-year note fell four basis points, or 0.04 percentage, to 2.24 percent at 12:31 p.m. in New York, according to Bloomberg Bond Trader Prices. Last week the yield rose 27 basis points, the most since the week ended July 1.
Respondents in the survey expect the benchmark yield to rise to 2.40 percent in the next three months, well above the second-quarter median forecast of 2.20 percent of 77 economists surveyed by Bloomberg News.
The majority of investors in the Citigroup survey believe that convexity related flows may become meaningful once yields are around 2.55 percent. Convexity is a measure of the rate of change of a bond’s duration because of interest-rate movement.
“People have a lot of questions about when convexity will kick in,” Gollapudi said. “If yields go beyond the expected levels then their may be convexity selling,” he said, pushing yields even higher.
Sixty percent of survey respondents also said they don’t expect any form of quantitative easing during this Federal Reserve cycle, or until it changes monetary policy, slightly above Citigroup’s 50 percent odds, according to Gollapudi. The Fed has held its target rate at a range of zero to 0.25 percent since December 2008 and has pledged to keep it unchanged until the end of 2014.
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