(Bloomberg) -- Barclays Capital’s strategists, some of Wall Street’s biggest bond-market bears, ditched their recommendation to bet against 10-year US Treasuries, saying a shift in positioning after the recent rally will likely curb any rise in yields.

The analysts led by Anshul Pradhan recommended late Thursday that clients take profits from the short position, which they initiated in early March when yields were at 4.08%. 

The strategy would have paid off as the 10-year yield jumped to over 4.7% by late April. But bonds rallied sharply this month after a string of soft economic data rekindled expectations that the Federal Reserve will ease monetary policy later this year. The 10-year yield has fallen 8 basis points this week to 4.42%, heading for its third weekly decline. 

While Pradhan said investors are too pessimistic about the economy, he said the strong market reaction to the modest data misses suggests that positioning has become less favorable to bearish bets.

He pointed out that investors have been pouring into long-term bond funds since Fed Chair Jerome Powell this month swatted away speculation it may raise rates again. Fixed-income funds have also extended exposure to duration, a move that would pay off if yields fall.  

Meanwhile, other type of investors, including macro hedge funds and commodity trading advisers are “quite short duration,” increasing the risk of short-covering, according to Pradhan.  

“While from a levels perspective, yields across the curve are again too low, we would await balanced positioning,” the strategists wrote in a note.

The strategists kept their bearish wager on August Fed fund futures, saying the probability of a rate cut priced into the late July meeting was too high.

“It likely will take longer for the Fed to gain confidence even if the good run of inflation data continue,” the strategists wrote. “Flows are unlikely to de-link the front end from fundamentals.”

Barclays forecasts that 10-year yields will rise to 4.6% by year-end, compared with the average prediction of about 4% among economists and strategists surveyed by Bloomberg.

(Upated bond yields in third paragraph.)

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