Hedge Fund Bond Bears Relentlessly Sell Treasuries

(Bloomberg) – Hedge funds extended their streak of record selling short-term Treasuries amid bets that the Federal Reserve’s fight against inflation is far from over.

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Leveraged investors strengthened their net two-year Treasury short positions for an eleventh consecutive week through June 6, according to the latest Commodity Futures Trading Commission figures compiled by Bloomberg. It is the longest race on record according to data dating back to 2006.

The positions provide insight into quick bets as a crucial week approaches, whether the Federal Reserve will raise interest rates again remains up for debate. While aggressive rate hikes have helped reduce price pressures in the United States, inflation remains well above target, boosting confidence for hedge funds looking to short Treasuries .

Investors are “signaling that rates will need to hold higher for longer than previously thought,” said Andrew Ticehurst, rates strategist at Nomura Holdings Inc. in Sydney. “Central banks aren’t done yet: rates are going to go up a bit more, and we were already a bit scared last week with the Reserve Bank of Australia and the Bank of Canada raising rates unexpectedly. “

On an aggregate basis, hedge funds also added net short bets on Treasuries over the same period, the data showed. Some of these bets could also relate to so-called “basis trading,” where speculators seek to profit from small differences in yield between cash treasury bills and corresponding futures contracts.

Yields on two-year US Treasuries – among the most sensitive to monetary policy – ​​were little changed at 4.61% at the start of Asia on Monday. Benchmark 10-year yields held steady at 3.75% after rising five basis points last week.

That said, some of the world’s largest bond managers, from Fidelity International to Allianz Global Investors, say the damage from previous rate hikes is done and a recession in the United States could yet occur, which which would likely strengthen the bond market.

And the downtrend of hedge funds also contrasts with some other measures of market positioning. The latest Bank of America sentiment survey showed so-called US durations at their highest since at least 2004, even as concerns about lingering inflation grew.

Swap traders still expect the US to cut rates by around a quarter point by the end of the year.

Goldman Sachs Group Inc. is among Wall Street banks saying the market impact of any Fed pause this week is likely to be short-lived.

“Absent a recession, we remain skeptical of achieving the currently set amount of easing,” Goldman strategists, including Praveen Korapaty, wrote in a note. We “continue to believe that the risks to these forward rates are on the upside.”

(Updates with BofA investigation in eighth paragraph)

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