Hedge funds are betting on higher Treasury yields in a market that’s divided over whether the US economy can avoid recession and Federal Reserve interest-rate cuts.
Recent positioning data suggests leveraged investors are about as confident as the central bank is that a slump be dodged even as the past year’s inflation-fighting policy tightening bites on activity.
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That group of investors boosted net shorts on 10-year Treasury futures to a record 1.29 million contracts as of April 18, data from the Commodity Futures Trading Commission show. It was the fifth straight week that net shorts had increased.
“Hedge funds may be thinking that inflation will be stickier than many in the market are currently expecting,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “On the face of it, this big short doesn’t reflect the view that there will be a near-term recession.”
Still, not everyone in the market is convinced. While swap markets show another quarter-point Fed hike in May is being priced as close-to-certain — and there’s even the marginal possibility of another one in June — they also indicate that the central bank will be cutting in earnest again by the end of the year on the back of a more painful economy.
Also, while leveraged funds have been increasing their bearish wagers on 10-year Treasury futures, other asset managers have been going in the other direction and amping up their longs. With ongoing uncertainty about recession risks and what the Fed will do, it remains very much a two-way market as investors stake out positions on either side of the divide.
Read the full article here by Garfield Reynolds, Advisor Perspectives.
