Column-Hedge funds most bullish on 10-year Treasuries since 2017

Forex 30 minutes ago (Oct 04, 2021 09:16AM ET)

© Reuters. Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 29, 2021. REUTERS/Brendan McDermid/File Photo

By Jamie McGeever

ORLANDO, Fla. (Reuters) - If hedge fund plays on the dollar and U.S. Treasuries are a weather vane for investors' risk appetite and the economic outlook more broadly, then hold on to your hats.

Chicago futures markets data show they have built up their largest long position in 10-year U.S. government notes in four years and increased their multibillion-dollar bet on a stronger greenback to its biggest in 18 months.

These trades - banking on low long-term borrowing costs, a flatter yield curve and a firmer dollar - indicate concern over future growth prospects, a strong desire for safety or lack of concern over inflation. Or all three.

Data from the Commodity Futures Trading Commission show that in the week to Sept. 28 hedge funds and speculators ramped up their net long 10-year Treasuries holdings by almost 120,000 contracts to 181,207 contracts, the most since October 2017.

This is the first glimpse into how hedge funds are repricing interest rate risk since the Federal Reserve's Sept. 22 policy meeting, which opened the door to an earlier and more aggressive tightening process than previously anticipated.

Funds' rush into 10-year Treasuries completely reversed their selloff ahead of the meeting, and coincided with a deterioration across financial markets as investors grappled with the prospect of interest rates rising next year.

Reflecting the Fed's hawkish tilt, speculative accounts more than doubled their net short two-year Treasuries futures position to 62,829 contracts.

So far at least, this bet is not paying off: the 10-year yield jumped to 1.55% this week from 1.30% the day of the Fed's policy statement, and the two-year/10-year yield curve steepened by 15 basis points to 125 bps.

But the warning bells are ringing. The S&P 500 had its first 5% drawdown in almost a year and September marked the biggest monthly fall since March last year; the VIX index jumped above 20; U.S. consumer sentiment hit a seven-month low, and the near-term growth outlook is dimming.

KING DOLLAR

This is the kind of environment that favors bonds, a flatter yield curve and the dollar. On that final note, at least, funds are on a winner.

CFTC data show they increased their net long dollar holdings for an 11th straight week, by almost $2 billion to $15.3 billion. That is the largest since March last year.

The dollar strengthened for a fourth consecutive week to hit an 11-month high against a basket of currencies, boosted by rising short-term real yields, safe-haven demand and a spike in ultra short-dated bill rates due to the U.S. debt ceiling impasse.

The dollar often performs well in times of slowing growth and rising economic uncertainty. On the face of it, this appears counter-intuitive, but in the relative world of exchange rates the dollar provides safety and liquidity.

Domestic U.S. and global growth momentum is slowing. Economists at Barclays (LON: BARC ) note that softening business investment is consistent with the slowing in demand amid renewed Covid-19 infections, ongoing supply constraints and a cautious consumer.

Their third quarter GDP tracker closed last week at 3.4%, suggesting further downside risks to their official forecast of 4.5%.

Right now though, of course, the hottest issue for investors is inflation. Are current elevated levels transitory, as the Fed still insists? Is a more damaging, longer lasting overshoot in the cards? And more pertinently, what will the Fed do?

For all the talk of inflation taking hold, some key inflation expectations measures offer a different perspective.

Breakeven inflation rates across the curve have popped higher since the Fed's Sept. 22 meeting, but they are still well below where they were earlier in the year. Inflation-protected Treasury bonds, or TIPS, have gone down in price since then too.

Goldman Sachs (NYSE: GS ) economists just raised their 2021 forecast for core PCE inflation - the Fed's preferred measure - to 4.25% from 3.9%. But their end-year projections for the following three years are 2.00%, 2.15% and 2.20% - hardly runaway inflation.

This is the kind of outlook that suggests current price pressure will indeed prove transitory, which hedge funds and speculators - at least for now - appear to be buying into.

Column-Hedge funds most bullish on 10-year Treasuries since 2017

Related Articles

Dollar sturdy after 4 consecutive weeks of advances By Reuters - Oct 04, 2021

By Saikat Chatterjee (Reuters) - The dollar consolidated gains against its rivals on Monday after four consecutive weeks of increases as widening concerns about the Chinese...

Dollar Edges Lower; Nonfarm Payrolls Key This Week By Investing.com - Oct 04, 2021

By Peter Nurse Investing.com - The dollar edged lower in early European trade Monday, but remained just below last week’s highs given the on-going concerns over China’s property...

Dollar Down, But Near Previous Week’s Highs Over Evergrande Fears By Investing.com - Oct 03, 2021

By Gina Lee Investing.com – The dollar was down on Monday morning in Asia, but remained near the highs hit during the previous week, thanks to renewed concerns about China...

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

October 05, 2021 at 01:16AM
Reuters
https://ift.tt/3BeIXkc