RPT-COLUMN-Hedge Funds Score Typer Hat Trick: McGeever
(Chronicle of rehearsals first published Monday)
ORLANDO, Fla., Sept.27 (Reuters) – Ahead of the Fed policy meeting last week, hedge funds sold Treasuries, positioned for a steeper 2s / 10s yield curve, and increased their bullish bets on the dollar.
Based on the initial market reaction to the Fed’s hawkish turn, the combined game was perfectly in sync.
The question now is whether this is really the start of a sustained rate hike and steepening of the curve, or yet another false dawn.
Data from the Commodity Futures Trading Commission shows that hedge funds and speculators in the week to September 21 cut their net long holdings of 10-year Treasuries by more than half and added to their net short position in 2-year bonds.
They reduced their 10-year net long holdings from 68,202 contracts to 61,221. This followed a large move in the other direction the week before and came just before the Fed hint that it will start. cutting back on bond purchases “soon” does trigger higher yields and increased volatility in the bond market.
At the same time, they were net sellers of 5,768 much smaller contracts over the 2-year space to increase their net short position to 30,401 contracts. This bet on a “steepening down” of the curve, driven by a more aggressive selling of the longer-dated issue, appears to be in the money.
The curve steepened by more than 10 basis points in the wake of the Fed meeting, the steepest in 18 months and one of the steepest steepening in years. At 118 bps, the curve is now at its highest level for two and a half months.
Supply constraints are pushing inflation and inflation expectations higher, prompting some Fed officials to consider raising interest rates as early as next year.
If these supply-side pressures are compounded by demand-side impulses, yields could continue to rise and the curve could steepen further. To be sure, short-term momentum appears to be on the rise, with the 10-year rate finally breaking the recent peak around 1.38%.
Citi strategists believe the curve will continue to steepen in the near term as investors inject more term premiums into the longer term. Ten-year Treasuries can also be vulnerable to a shift in asset allocation looking for a rally in stocks at year-end.
But there remains a high degree of uncertainty about how the economy will withstand the Delta variant, a relative tightening of fiscal policy, the reduction of its bond purchases by the Fed, growth concerns. world fueled by China and ultimately rising yields itself.
The Fed has lowered its GDP growth forecast for 2021 to 5.9% from 7.0% in June, and growth is expected to slow further next year. That’s not the consensus at the moment, but these factors could dampen the rise in longer-term yields and flatten the curve.
Whether yields continue to rise, the curve steepens or flattens, or the market is in “risk on” or “risk off” mode, the dollar is attracting buyers.
Hedge funds extended their net long dollar holdings for a tenth week, and at $ 13.45 billion, the largest since March of last year. The dollar hit a one-month high against a basket of currencies last week and is on the verge of printing new highs for the year.
But funds will be well aware that the volatility they thrive on remains stubbornly elusive in the forex arena. One-month euro / dollar implied volatility slipped to 4.338% on Friday, the lowest since February of last year just before the pandemic hit.
This indicates relatively favorable market conditions and limited trade. If this is the case, the short-term rise in bullish dollar fund bets may be limited.
By Jamie McGeever; Editing by Daniel Wallis