Just a couple of months ago, most U.S. Treasury-bond investors were speculating that big tax cuts and increased spending by President Donald Trump's administration would fuel faster economic growth -- and with it, faster inflation.
So they bet that Treasury yields would rise.
Since then, there's been a complete reversal, according to Bank of America (BAC) analysts. Now, speculative traders are almost unanimously betting on the opposite -- that Treasury yields will fall. And, because such "crowded trades" are often a sign of a sharp market reversal in the offing, the analysts predict that Treasury yields are set for a big increase over the next month.
"Extreme positioning typically leads to contrary moves in rates," the Bank of America analysts wrote. It's somewhat intuitive, they added: "Profit-taking dampens moves in the 'right' direction while position-covering accelerates moves in the 'contra' direction."
The yield on 10-year Treasury notes ended last week at 2.33%, down from a three-year high of 2.65% reached in March.
According to the Bank of America analysts, when positioning in the market is as concentrated as it is now, Treasury rates have risen 70% of the time in the following month.
Rising rates would mean falling prices -- in turn sapping returns for investors in U.S. government-bond exchange-traded funds like the iShares U.S. Treasury Bond ETF (GOVT) .
"Positioning has now swung the other way, and we think this bodes well for bond bears over the next month," the analysts wrote.