- US interest futures show divergence between short-end and long-end contracts amid mixed policy signals and upcoming data.
- Long-dated contracts remain resilient, eying fiscal issuance signals safe-yield demands.
- Market participants await US NFP figures for more impetus and cues for Fed policy.
US interest futures remain choppy as deteriorated risk sentiment meets mixed policy signals and upcoming data risks. The divergence between front end of the curve and longer dated contracts is quite evident now. The short-term contracts like 30-day Fed funds futures that price in policy expectations are fluctuating as traders trim the hopes of aggressive near-term easing. The CME FedWatch tool shows the probability of December rate cut at 67%, the lowest in two weeks.
The 2-year Treasury futures (ZT1) particularly remained volatile this week amid Fed commentary and US jobs data expectations, as traders repositioned for the NFP print today. Any weakness in the jobs data could trigger a quick rally in ZT1 as markets will favor earlier rate cuts. Alternatively, stronger figures could ignite a sharp sell-off in the short dated contracts.
On the other hand 10-year note futures (ZN1) and 30-year T-bond futures (ZB1) reveal a nuance of mixed factors. Persistent term-premium concerns and slow repricing of terminal rates continue to drive the markets. Due to inflation expectations along with Treasury supply and global demand, the long-dated contracts have shown resilience. Since Fed wrestles with timing of rate cuts, higher expected Treasury issuance and inflation above the targets are keeping floor under the longer yields.
Another layer of complexity is added by the liquidity and funding conditions. SOFR-Fed funds spread and short-dated indicators stay irregular, creating volatility in the short-term contracts, pushing investors to long end interest futures. Traders sell the belly curve to hedge the risk but a sharp shift in Fed tone or data could unwind the trades.
This implies the short-end futures remain data and headline sensitive, awaiting the US NFP figures and US CPI for further directional bias. Hence, the activity will remain subdued until then. Meanwhile, long-dated futures traders will keep eyes on fiscal issuance signals and demand for safe-yield across the border.