LONDON (Reuters) - The jury is still out on whether the 10-year U.S. Treasury yield’s move above 3 percent is the historical break higher confirming the end of the 30-year bond bull market. The verdict from hedge funds, however, is unequivocal: it is.
Their conviction that yields are heading higher has never been stronger, and they are putting their money where their collective mouth is.
The latest Commodity Futures Trading Commission figures for the week ending Sept. 25 show funds increased their net short position in 10-year Treasury futures to 756,316 contracts.
That’s speculators’ biggest short position since CFTC began compiling the data in 1995. It’s the sixth week in seven they have increased it, and the rise of around 400,000 contracts in July-September is the second biggest quarterly change on record.
Almost the entire short position, some 672,650 contracts, has been accumulated over the course of this year, putting 2018 well on track to be funds’ most bearish year for Treasuries since at least 1995.
September was certainly a bad month for Treasuries. They lost nearly 0.95 percent, the steepest monthly decline since January, according to an index compiled by Bloomberg and Barclays.
The 10-year yield broke above 3 pct in mid-September and reached 3.11 pct on Sept. 25, the highest since May and less than two basis points away from levels not seen since 2011. It’s still comfortably above the psychologically key 3 pct level.
Unsurprisingly given the rise in yields, the Fed unwinding QE, rising supply and hedge funds’ record short position, activity in the U.S. bond market is picking up. Open interest in 10-year Treasury futures is above 4 million contracts for the first time ever.
The longer the 10-year yield stays above 3 pct, the deeper the market’s bearish conviction will grow. On the other hand, the longer it fails to break into 2011 territory the greater the pressure on funds to cut back on some of their short position.
Analysts at HSBC are among the few sticking to their view that yields will head south again. Last week they upped their end-2018 and end-2019 forecasts to 2.80 pct and 2.50 pct, respectively, but pointed out that is still below the current market and significantly below consensus.
“Our analysis shows there is limited room for yields to increase - but significant room for them to fall - compared with what is being priced by the forwards,” they noted.
The Fed raised interest rates last week for the eighth time this cycle and removed from its statement its longstanding reference to policy being “accommodative.” It still foresees another rate hike this year and three more next year.
Fed chair Jerome Powell said it is a “particularly bright moment” for the U.S. economy and that the growth outlook remains positive. For the time being, at least, hedge funds and the broader market appear to be shifting towards that view.
Hedge funds and specs will be hoping performance in Q4 makes up for what has been a poor to mediocre year in the fixed income and macro space.
Barclayhedge’s Global Macro Index is down 0.45 percent so far this year, one of only four sub-set hedge fund indices in the red year to date along with Emerging Markets (-6.70 pct), Pacific Rim Equities (-2.93 pct) and Multi Strategy (-0.69 pct).
The main hedge fund index is up 1.26 pct, exactly the same as the Fixed Income Arbitrage index.
Eurekahedge’s macro index is down 1.09 pct so far this year, its CTA/Managed Futures index down 1.15 pct year to date, but its fixed income index is up 0.93 pct.
The opinions expressed here are those of the author, a columnist for Reuters.
By Jamie McGeever; Editing by Matthew Mpoke Bigg