Column: Funds miss on one-way US yield curve swap: McGeever


ORLANDO, Fla., Dec. 6 (Reuters) – Almost the entire world seems to be betting on a flatter U.S. yield curve, such is the strength of the move that has been underway for weeks and, by some measures, the most aggressive in years.

If the latest positioning in the US futures market is any indication, however, hedge funds are not in the game.

Commodity Futures Trading Commission data for the week to November 30 shows funds moved to a net long position in two-year Treasury bill futures, only slightly reduced their significant short position net at 10 years and increased their net short position in the 30- year space.

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Collectively, these are changes that will benefit from a steepening in the yield curve or a widening of the spread between short and longer-term rates. Buying or buying “long” bonds is basically a bet on lower yields, while selling or “short” debt is usually a bet on higher yields.

The funds reduced their net short position in 10-year Treasury bill futures from 10,044 contracts to 313,371 contracts, which is still close to the previous week’s biggest net sell since February of the year. last just before the COVID-19 pandemic.

Meanwhile, their net long 2-year Treasury futures position is only 15,670 contracts, but this is the first net long position since August. The previous week’s 62,290 contract swing was also the biggest in four months.

While CFTC data seems to show that funds are reconsidering when or the level at which the Federal Reserve will raise short- to medium-term interest rates and maintain a higher long-term rate outlook, that is exactly the point. the opposite happened in the market.

All parts of the US curve are flattening, raising red flags about anti-inflationary rate hikes that could affect the economy, limiting the Fed’s ability to significantly tighten policy and possibly even forcing it to cut rates in the near future. Read more

BPS

DISCONNECT

For parts of the curve, the past week has been historic. Spreads between 2- and 10-year rates and 2- and 30-year rates narrowed by 22 and 24 basis points, respectively, the largest weekly flattening of the curve since May 2012.

This had two main factors: the hawkish testimony of Fed Chairman Jerome Powell to Congress, which exerted upward pressure on short rates; and the spread of the Omicron variant, which stoked growth fears and fueled demand for long bonds.

Barclays economists now expect the Fed to start raising rates in March. Their Bank of America counterparts also said March was now “on the line,” and former Treasury Secretary Larry Summers said the Fed is expected to increase four times next year.

But the Omicron variant, and its possible impact on travel and demand, can affect economic activity. Quoting Omicron, economists at Goldman Sachs lowered their growth forecast in the United States for 2022 this weekend to 3.8% from 4.2%.

As long as this disconnect persists between the Fed’s increasingly hawkish outlook and an increasingly fragile growth picture, the yield curve may find it difficult to steepen sharply, if at all.

“Although the curve has already flattened considerably, there is an additional flattening risk. We are short-term conditional bear flatteners buyers,” Deutsche Bank bond strategists wrote in a note this week. -end.

This would provide the funds with an opportunity to enter into trade. A look at the evolution of CFTC positions on the Treasury bill futures curve over the past month shows that they missed it for some time.

In November, the funds eliminated their two-year net short position of over 100,000 contracts, massively increased their 10-year net short position by almost 200,000 contracts and reduced their 30-year net short position for the first time since. June.

Compared to what actually happened in the bond market last month, only buying on the ultra-long end would be “in the money”. The two-year yield edged up, yields on 5 to 30-year maturities fell, and all parts of the curve flattened.

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By Jamie McGeever

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