On Friday (October 9th), a subtle shift occurred in sentiment within the US Treasury market. The selling logic that had dominated the market for the previous weeks was being challenged: 30-year Treasury yields approached the 5.75% mark and encountered large-scale buying from actual funds, resulting in a textbook- perfect reversal day —yields hit a new intraday high before falling back and closing below the previous trading day's low. The subsequent $22 billion reissue auction saw the winning bid price penetrate 0.1 basis points, with demand continuing until the close, further reducing yields to around 5.60%. In the past six trading days, there have been five instances of buyers appearing at the close of long-term bond issuances, with two reversals reaching 7 and 13 basis points respectively. The implication of this price behavior is clear: the market is not lacking buyers, but rather, real-asset funds are systematically absorbing the selling pressure from leveraged funds. Fundamental analysis also supports this shift. The three major factors that have suppressed the bond market in the past two months—the erosion of consumption by high energy prices, the potential for European sovereign debt pressure to force the ECB to adjust its balance sheet reduction pace ahead of schedule, and still crowded short positions—are transforming from negative variables into reversal fuels. Data from the options market confirms the extreme nature of market anxiety: the cost of hedging against a sharp short-term rise in 10-year swap rates has risen to its highest level since the banking crisis in March 2023, and surges in payer skew typically occur in areas of extreme sentiment. Meanwhile, an international investment bank predicts that hyperscale cloud service providers may issue a record $420 billion in bonds next year. The AI financing boom triggering a sell-off of government bonds for hedging and the convex hedging demand in the mortgage market constitute the main sources of short-term selling pressure. However, these mechanisms are flow-type pressures , while the demand from allocation positions is for existing assets; the two are different in nature. Technically, the 8-day moving average has become a watershed between bullish and bearish trends: 5.64% for the 30-year moving average and 5.27% for the 10-year moving average. Yields may test and break through these averages in the short term, but whether they can recover by the close is the key criterion—if they cannot recover, the reversal structure will be further confirmed, and the large leveraged short positions will face the risk of being squeezed. Support and resistance range prediction: The reference contract is the main 10-year US Treasury futures. Range logic: Yesterday's key reversal in long-term bonds, coupled with continued buying by actual funds, suggests that the upward slope of yields is likely to slow. The short-term upward resistance for the 10-year yield is around 5.29%, with a support range of 5.27% to 5.21%, which also covers the 8-day moving average and the recent lower edge of the consolidation range. Intraday focus: The preliminary reading of the University of Michigan Consumer Sentiment Index for October (expected 47.8, previous 48.1) and one-year inflation expectations (which rebounded to 4.6% last month), as well as policy statements from Boston Fed officials. The impact of these data on inflation expectations will directly test the effectiveness of the support range. In the short term, if the closing price continues to hold below the 8-day moving average, US Treasuries may experience a rapid decline in yields driven by short covering. The trend of the 10-year to 30-year yield spread (currently around 37 basis points) will verify whether the pricing logic of the term premium has loosened. In the medium term, the inertia of the short-term structure of fiscal issuance remains, and the high yield fluctuation center may not disappear quickly. Investors need to be wary of fluctuations caused by better-than-expected data.

Further Reading

I. What is a key reversal day, and why is it important? It refers to a single-day pattern where prices reverse course after reaching a new high (or low) and close below the previous extreme value, usually indicating a weakening of one side's momentum. The current pattern in the 30-year futures market is confirmed by massive buying, making it technically reliable. II. Why is payer skew considered a sentiment indicator? When investors concentrate on buying options to hedge against rising interest rates, it indicates extreme hedging demand, historically occurring near cyclical yield highs, thus increasing its contrarian reference value. III. How does convex hedging amplify volatility? Rising interest rates lengthen the duration of mortgage-backed securities, forcing institutions to sell Treasury futures to hedge, creating a feedback loop of "rate rise—sell-rate rise again," but this mechanism is self-limiting. IV. What does a widening term premium indicate? The rise in long-term bond yields exceeding that of short-term bonds, occurring at absolute yield highs, reflects investors' demand for higher compensation for long-term fiscal sustainability, rather than a repricing of the central bank's policy path. V. Why do allocation-based and leveraged positions move in opposite directions? Funds allocated to investments are anchored to absolute returns, and the 20-year high level naturally attracts them; leveraged funds follow trends and holding costs, and the two frequently form opposing positions in extreme value areas, which is the micro basis for the reversal.