(Bloomberg) -- Treasury investors see more room for gains than losses in the short term as US inflation is expected to show underlying price growth in the economy is slowing. 

With Treasuries already trading at the weakest levels of the year, banks including Wells Fargo & Co. posit that a big move is more likely in response to a benign inflation reading than a hot print later Wednesday.

Traders have been reducing their expectations for Fed cuts in recent weeks and swaps currently favor two quarter-point reductions this year. A softer inflation print could shift the balance back toward three.

Mohit Kumar, strategist and chief economist for Europe at Jefferies International, said the risks are tilted toward lower rates and higher risky assets, particularly if the reading for inflation is in line, or lower, than the 0.3% that’s forecast.

“Only if we get a sizable miss to the upside — 0.5% month-on-month or above — that we could see a sustained selloff in rates and risky assets,” he said.

Positioning indicators also suggest the market is vulnerable to a so-called short squeeze. CFTC data shows funds that use borrowed money to amplify returns increased short positions in the Treasury futures market for the first time in two months.

JPMorgan Chase & Co.’s latest client survey shows a rise in short positions that left clients net neutral — as opposed to net long — for the first time in almost a year as of April 8.

Still, market reaction to key data is rarely straightforward. Treasury auctions on Wednesday and Thursday have the potential to mute any reaction, and yields are close to levels that investors are targeting as the entry point for establishing new long positions.

Jefferies’ Kumar is expecting rates to drop over the medium term and is looking to buy five-year Treasuries if the yield rises above 4.45%. It was around 4.36% on Wednesday morning.

Investor interest in buying at higher yield levels may keep the 10-year Treasury rate — which peaked Monday at 4.46% — from topping 4.5% for the first time since November in the event of higher-than-expected inflation, RBC Capital Markets strategist Blake Gwinn wrote in a Tuesday report. 

There remains “some uncertainty as to whether would-be dip buyers get cold feet on any break of 4.5%,” Gwinn wrote.

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