The market’s beloved economic growth story is running into trouble

Trading Nation: Bond yields sink

The misses continue to pile up.

On Monday morning, the durable goods number showed that U.S. factory orders fell by 1.1 percent in May, for the second straight month-on-month decline.

This soft number joins a plethora of data that have missed expectations over the past few weeks, and even months. We've highlighted the Citi economic surprise index in the past, and it continues to merit attention as it falls lower and lower. What this index is telling us, very simply, is that the economy is not as strong as Wall Street had thought.

It's no surprise, then, that we've also seen second-quarter GDP estimates from both the New York Fed and the Atlanta Fed continue to decline. In fact, over the course of the month, the New York Fed Staff Nowcast estimate for Q2 growth has fallen below 2 percent.

As the faster-growth-will-cause-greater-inflation narrative has taken hits, commodities have felt the pain. Declining oil prices has been the talk of trading desks, but more generally, industrial commodity prices have suffered a substantial drop this year that has accelerated in the past month.

As we can see, there are a lot of reasons to worry that the strength of the economy is waning – and from an investment perspective, that interest rates should therefore stay low.

However! Having said all this, I do worry about the positioning in the futures market.

It seems I'm not the only person keeping an eye on economic data, and the "speculators" in the futures market have very large net long positions in the 10-year Treasury note, according to Commitment of Traders data. This tells me that we could see more downside movement in long-term rates over the very near term, but after that, we could soon see a "tradable," multiweek bounce in interest rates.

Going forward, we'll be watching the sentiment numbers. The daily sentiment index is showing that bullishness in Treasury bonds (bullishness on the price, not the yield) has reached 78 percent. That's not at the extreme levels that would signal we are getting ripe for an immediate reversal, but it is getting pretty high.

If and when that number rises into the 90s, we'd begin to look for a reversal – in this case, a bounce in rates and a decline in bond prices.