The long-term outlook remains challenging, but the bond market may be due for some short-term relief

The Treasury market could be due for short-term relief, but concerns about the $40 trillion national debt and interest costs remain.

The mounting U.S. debt is an intractable problem. A quick look at the numbers shows how interest payments are set to snowball, potentially creating all sorts of other problems down the line.

A looming truckload of newly issued bonds can certainly continue to weigh on prices in the $31 trillion Treasury market over the long term, particularly now that the U.S. national debt has topped $40 trillion for the first time.

However, in the near term, signs that prices for Treasury notes and bonds have fallen too far, too fast, continue to mount. While the long-term outlook for the U.S. government-bond market remains challenged, savvy traders appear to be positioning for a rebound in the weeks and months ahead. Bond yields and prices move in the opposite direction.

The Trump administration made clear its discomfort with the 30-year Treasury yield's BX:TMUBMUSD30Y climb last week to its highest level since 2007. The Treasury Department surprised investors by saying its buybacks will increase on long-dated U.S. government debt starting in September. The news had only a fleeting impact on yields after it was announced - triggering a sharp drop that was quickly reversed the following day.

However, a brief rebound followed on Monday and Tuesday, as yields moved lower as oil prices declined.

For the 30-year bond - often referred to as the long bond - there are signs that yields already are straining what is likely the upper bound. The White House and Treasury Department have signaled they are prepared to take dramatic action. President Donald Trump, in comments to the press corps last week, even suggested the military might be used as part of an "ultimate intervention" in the bond market.

"For now, 5% is probably the resistance level," said Tom di Galoma, a managing director at Mischler Financial Group. "Once we start going through that level, there will be more buying pressure."

Di Galoma isn't alone in expecting some relief from a relentless bond-market selloff that has sent the yield on the long bond to 5.18% on Wednesday, about 50 basis points above the lows of the year in March, according to FactSet. Citadel Securities macro strategist Frank Flight, in a recent report cited by MarketWatch, said he thinks yields are headed lower over the next few months. An abrupt shift in positioning could even force a so-called short squeeze, in which those who have bet on bond prices falling are forced to buy them back, pushing prices up even higher, Flight said.

Mike Shell, chief investment officer of Shell Capital, flagged a couple of signs that the Treasury market is starting to price in a "Bessent put." A variation on the idea of the "Fed put," the "Bessent put" suggests the U.S. government could step in to try and drive yields lower.

After Bessent's buyback announcement failed to do the trick last week, reports surfaced on Monday claiming the Treasury could tap the nearly $1 trillion Treasury General Account to finance the buybacks, rather than issuing more debt.

There are signs that traders are starting to position for a sharp move lower in yields. Shell pointed out that Treasurys have recently outperformed swaps, a sign that investors are gravitating back toward the longer end of the curve. The skew in Treasury options has turned more bullish, signaling that more traders are piling into bullish call-option contracts that could pay off if bond prices rise.

Leveraged funds cut back on bearish bets

Leveraged funds have continued to bet against futures contracts tied to long-dated bonds. Their net-short position touched their highest level in recent memory back in July, according to weekly data published by the CFTC. It has only modestly improved since then, as the chart below shows.

When positioning in futures markets starts to look stretched in either direction, it could signal that a reversal is imminent. Indeed, there are signs that leveraged investors have already started to change their tune.

Traders at JPMorgan said in a recent note that there was chatter that CTAs, a type of trend-following fund that operates in the futures market, started to boost bullish bets on the 10-year Treasury note BX:TMUBMUSD10Y as yields neared 4.6% this week. The yield on the 10-year note stood at 4.659% in recent trading, FactSet data showed.

TLT inflows jump

There are also signs that some investors see higher yields as an opportunity to buy bonds at attractive prices.

Earlier this month, the iShares 20+ Year Treasury Bond ETF TLT saw one of its biggest daily inflows on record, as demand for long-bond exposure suddenly surged.

A strong pace of inflows has persisted since then, even as the ETF briefly touched its lowest price since 2004.

Yields on 10-year and 30-year Treasury bonds rose on Wednesday, snapping a two-day stretch of declines, Dow Jones Market Data showed.

Ken Jimenez contributed

-Joseph Adinolfi -Joy Wiltermuth