In the first paragraph, refers to U.S. rates increasing last year to 2018; “first rate rise since 2018” is corrected.

By Jamie McGeever

ORLANDO FL (Reuters] – Hedge funds, speculators and hedge funds are dumping U.S. Treasury securities at a speed never seen before. It is a sign the Federal Reserve’s rapidly accelerating momentum behind bets for its first interest rate rise since 2018.

The latest CFTC positioning data don’t capture the market-based rise in inflation expectations, which reached new heights last week. They also miss the hawkish comments made by Fed Chair Jerome Powell.

These are all factors to consider, as well as the fact that Fed Funds futures show that traders believe the U.S. would hike the rate in the middle of 2022. There is every possibility that Treasuries’ bearish views may have hardened further.

Data from the Commodity Futures Trading Commission show that funds flipped to a very small short position during the week ending Oct. 19, after they dumped 156 586 10-year Treasuries Futures futures contracts. This is the biggest unwind since 2016 and third since contract launch in mid-1980s.

Since June 2013, funds have mainly been holding 10-year Treasury futures, but never in a significant way. This historic selloff may signal the return to bearish sentiment after two and half years.

The CFTC data shows that the funds also extended their net short position for two-year Treasury futures of more than 92,000 contract, marking the largest selloff since March.

This is despite the fact that the Bank of America (NYSE 🙂 latest fund manager survey has revealed investors are now more cautious than they were 20 years ago when the first poll was conducted.

It is evident that the volume of selling has increased, particularly in the 10-year section of the curve. This suggests that the discussion about whether inflation spikes are temporary is entering a new phase.

Last week, “Team Transitory,” suffered some serious blows.

Inflation swap rate and Treasury Inflation Protected Securities broke above the curve, to levels never seen before.

Powell admitted on Friday that the Fed is facing risks of “more persistent and longer-lasting bottlenecks, and thus to higher inflation” and acknowledged that current conditions are not the best for which the Fed’s “patient” approach was meant.

He also stated that it is not the right time to increase rates now and suggested that the Fed could be patient. However, this was just an echo of Fed’s position. No Fed official supports rate increases beyond next year.

BOLD, RECKLESS OR BOUND?

Keep in mind, just a few weeks back fed funds futures predicted a first rate increase in 2023. This has now been moved to mid-2022. A second hike is planned for later in the year.

It would make a bold move to lift off just in time for the Fed’s bond purchase taper. Others might call it reckless.

The longer bond market ends shows that investors have begun to consider the economic consequences of a earlier policy tightening cycle.

Flattening occurs at the long end of the curve, where the 20s/30s are less than two basis point away from inverting. The gap between 10- and 30-year yields is the smallest it has been in nearly two years.

This indicates that today’s tighter monetary policies will not slow down growth in the future. According to the Atlanta Fed, its GDPNow tracker for third quarter estimates a 0.5% annualized rate in comparison with 6% just a few months ago.

David Blanchflower (economist, former Bank of England policymaker) and Alex Bryson (professor of Economics), go even further.

They wrote that “Downward trends in consumer expectations over the past six months indicate the United States economy is in recession now (Autumn 202021), even though employment figures and wage growth figures would suggest otherwise.”

Investors are betting the Fed will begin to unwind its bond-buying program and raise rates next year, regardless of whether the economy is in recession or slowing down.