ZB Futures Outlook: Long Bond Squeezed Between Fiscal Supply and Sticky Inflation

War Premium, Record Issuance, and a Divided Fed

Sentiment in ZB and the broader long end of the Treasury curve remains fragile, caught between a hot geopolitical backdrop and a still uncertain domestic inflation and labor picture. The US and Iran remain locked in an active conflict that began in late February, and as of this week talks between Washington and Tehran remain at an impasse. Brent crude has traded above $91 a barrel and West Texas Intermediate near $85, both up more than 4.5% over the prior four sessions, after President Trump announced a fresh package of measures aimed at further isolating Iran economically and the UAE suspended trade and financial transactions with Tehran. The Strait of Hormuz remains effectively shut to normal shipping traffic, and that persistent energy risk premium is a key reason core inflation has stayed above target even as growth has cooled.

On the fiscal side, the Treasury caught the market off guard on August 19 by announcing it will at least double the size of its long end buyback operations, raising the per operation cap for 10 to 20 year and 20 to 30 year securities from 2 billion dollars to at least 4 billion dollars starting September 9 and running through the end of the current refunding quarter on November 4. The announcement came just days after a brutal stretch of long end supply, with the August 13 sale of 30 year bonds pricing at a yield of 5.216%, the highest since 2001, and Wednesday's 20 year auction indicating around 5.27% in the when issued market, the highest since that tenor was reintroduced in 2020. On the data front, July payrolls unexpectedly fell by 23,000 with unemployment at 4.1% and roughly 103,000 in downward revisions to the prior two months, while July CPI cooled slightly to 3.4% year over year headline and 2.5% core. That report pulled September rate hike odds down to around 42%. The Fed under Chair Warsh has now held rates steady at 3.50% to 3.75% for five straight meetings, but the last decision saw three regional presidents' dissent in favor of a hike, underscoring how divided the committee remains ahead of Warsh's Jackson Hole address on August 28.

What the Market Has Done

• Since the start of the year, the market has been progressively shifting value lower.
• From March to July, the market was in sideways consolidation between the 114 area (Minor level 1) and the 110 area (Daily level 3, a support level from 2023).
• Towards the end of July, the market was able to break below the 110 area and has since accepted below in a narrow range between 110 and 108 (Daily level 4, another support level from 2023).

What to Expect in the Coming Weeks

The key level to watch is the 110 area (Daily level 3) and the 108 area (Daily level 4).

Neutral Scenario

• If the market is unable to gain directional conviction, expect continued two way rotation and churn between 110 and 108 to build value lower.
• A condition supportive for this scenario would be a Jackson Hole speech from Chair Warsh on August 28 that neither confirms nor rules out a September hike, leaving positioning balanced into the next payrolls and CPI reports.

Bullish Scenario

• If the market is able to break back and accept above 110, expect a move up to the 112-2 level (Minor level 2).
• If there are no sellers defending here, expect a further move back up to 114 (Minor level 1).
• A possible trigger for this scenario would be a ceasefire or de-escalation in the US-Iran conflict that allows the Strait of Hormuz to reopen and oil prices to retreat, easing the inflation pressure that has kept the Fed hawkish.

Bearish Scenario

• If buyers are not able to defend the 108 area and the market breaks and accepts below that, expect a move down to the 105-20 area (Daily level 4, a daily support level from 2007).
• A possible trigger for this scenario would be a hotter than expected August CPI print or a further escalation in the Iran conflict that pushes oil decisively higher, strengthening the case for a September hike and forcing the long end to reprice for a longer restrictive stance.

Conclusion

ZB remains technically pinned in a battle zone between 110 and 108, and which side gives way will likely be decided as much by the geopolitical and fiscal backdrop as by chart structure. On the fundamental side, a war worn oil market, near record long bond supply, and a Federal Reserve that is openly split between hawks and doves are all keeping term premium elevated and two way risk alive, even as the Treasury's expanded buyback program works against the sellers. Traders should keep a close eye on Chair Warsh's Jackson Hole remarks on August 28 and the coming August payrolls and CPI data, since either could easily tip the balance toward the bullish or bearish scenario outlined above. Where do you see ZB heading from here, and are you positioning for a defense of 108 or a reclaim of 110?

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Disclaimer:

This article is provided for informational and educational purposes only and does not constitute financial, investment, or trading advice. The analysis presented reflects the author’s market observations and opinions at the time of writing and is not a recommendation to buy or sell any futures contract, security, or financial instrument. Futures trading involves significant risk and is not suitable for all market participants. Losses may exceed initial margin deposits, and market conditions can change rapidly.

Any scenarios, levels, or market expectations discussed are hypothetical in nature and are intended solely to illustrate potential market behavior. They do not represent actual trading results and should not be interpreted as guarantees of future performance. Past performance, market behavior, or historical price action are not indicative of future outcomes.

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