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Funds lose nerve on higher U.S. yields bet ahead of Fed By Reuters


© Reuters. Washington, U.S.A., February 27, 2019: This is the Federal Reserve Board Building on Constitution Avenue. REUTERS/Brendan McDermid/File Photo

By Jamie McGeever

ORLANDO, Fla. (Reuters) – Funds are loading back up on U.S. Treasuries ahead of the Fed’s Sept. 22 policy decision, suggesting they are not as confident as they were a few weeks ago that yields are headed higher.

According to data from the Commodity futures Trading Commission, hedge funds and speculators have bought the highest number of 10-year Treasuries Futures contracts since April.

The historic shift in opposite direction two weeks prior was reversed by them adding 128,643 more contracts to their net-long position. Funds have accumulated more contracts than that just 10 times in the past three decades of weekly CFTC data.

The Fed will meet on Wednesday to discuss this matter. It is likely to announce details of its plans to reduce monthly bond purchases but not before November or December.

Recent economic data is soft. The August employment report showed an enormous miss in net new job creations relative to consensus predictions.

Some indicators are also below forecasts. For example, the U.S. economy surprises index has dropped to its lowest point since June 2013, growth forecasts have been reduced, Wall Street has struggled, and the U.S. forecasts for the future have been revised down. It may not be surprising that money has restocked in 10-year Treasuries against this backdrop.

According to CFTC positioning information, the longer end has seen a lower demand for long-dated bonds. This indicates a bull flattening in the 2s/10s yield slope.

The net short position for 2-year Treasury futures fell to 24,633 from 65,257 in the week prior.

It did flatten at 106 basis points. That’s the lowest point in 3 weeks. The 10-year yield spiked to 1.38% Friday and has since been widening. This is the most in 2 months.

Are funds being left in the dust? Steve Major from HSBC observes that the yield on a 10-year bond is just above 1.30%. This year, it’s in the middle between 0.91% and 1.74%. Market conditions are delicate.

The Fed’s Wednesday meeting and the quality of the incoming data will have a significant impact on how the market reacts. Major has remained faithful to his forecast of a 1.0% yield for the next 10 years, which is substantially lower than many others.

However, Macro funds share Major’s doubts, and believe that yields will rise. The majority of them have been long Treasuries in the past year.

However, they are hoping to see some fireworks at the Fed’s Wednesday meeting. The Fed will likely offer some volatility in the third quarter to sustain their good performance through year-end.

(By Jamie McGeever; Editing by Lisa Shumaker)

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