By Jamie McGeever
ORLANDO, Florida (Reuters) – Hedge funds started the second quarter positioning for a steeper U.S. yield curve by offloading 10-year U.S. Treasuries futures at one of the fastest rates on record.
Commodity Futures Trading Commission (CFTC) data for the week ending April 4 offer the first insight into how funds are emerging from the historic volatility in March sparked by U.S. and Swiss bank collapses earlier in the month.
In one way, betting on a steeper 2s/10s yield curve indicates funds are hoping the trend of recent weeks continues – the curve steepened around 33 basis points in March, the biggest monthly steepening in a decade.
The difference is, that was driven by a massive “bull-steepening,” buying two-year futures when the banking shock forced funds to cover their near-record short position. These latest figures suggest a shift to “bear-steepening,” or selling longer-dated bonds.
Bull-steepening is when yields for shorter-term bonds fall quicker than longer-dated paper, and bear-steepening is when yields on longer-term bonds rise faster than shorter-dated paper.
In the week through April 4 funds increased their 10-year Treasuries futures net short position by almost 150,000 contracts. There have only been seven weeks of heavier selling since the contracts were launched in the mid-1980s, CFTC data show.
That took the net short position to 621,031 contracts, close to the 628,000 contracts from late February, which was the largest since 2018.
CFTC funds & 10-year Treasuries futures – weekly change, https://fingfx.thomsonreuters.com/gfx/mkt/lbpggwobmpq/cftc10y1.png
CFTC funds & 10-year Treasuries futures – net position, https://fingfx.thomsonreuters.com/gfx/mkt/egvbylmawpq/cftc10y2.png
On the other side of the 2s/10s curve trade, meanwhile, funds were net buyers of two-year Treasuries futures, trimming their net short position in the week by 23,422 contracts to almost 500,000.
A short position is essentially a wager that an asset’sprice will fall, and a long position is a bet it will rise. Inbonds, yields fall when prices rise, and move up when prices fall.
Hedge funds take positions in bonds futures for hedging purposes and relative value trades, so the CFTC data is not reflective of purely directional bets.
Hedge funds will be hoping April is kinder to them than March as far as their macro trades are concerned. They were completely blindsided by the banking shock and subsequent collapse in yields, especially at the short end of the curve.
Macro systematic funds, which place their bets based on algorithmic and technical models, fell 6.7% in March, its worst monthly performance in over five years, Bank of America said. London-based Rokos Capital Management was down around 15% in the month, said a source familiar with the matter.
It is likely to be another volatile month with little to no visibility on the economic data or Fed policy outlook, especially given the heightened uncertainty surrounding U.S. bank deposit flows, lending and credit standards.
US 2s/10s yield curve, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjkjlrapr/UScurve1.jpg
The 10-year Treasury yield fell around 20 basis points to 3.35% in the week through April 4, then slipped to a fresh seven-month low of 3.27% before heading back up to 3.40% on the back of the March employment report.
The 2s/10s curve inverted further too, by around 20 basis points to -60 bps.
US 2s/10s yield curve since March 1, https://fingfx.thomsonreuters.com/gfx/mkt/myvmojgkdvr/UScurve2.jpg
(The opinions expressed here are those of the author, acolumnist for Reuters.)
Related columns:
– Another Fed milestone? Policy peak with negative real rates
– Historic 2-year US bond shock is a VaR game-changer
(Reporting by Jamie McGeever; editing by Jonathan Oatis)
