By Jamie McGeever

ORLANDO FL (Reuters) – The selling by hedge funds of 10-year Treasuries futures was halted ahead of the U.S. Consumer Price Data last week. But the rise in annual inflation of its highest levels in three decades suggest that the hiatus might be temporary.

November 10th’s inflation report was always going be big. It could have a pivotal impact on the Fed’s decision about when and how high it raises interest rates in the future.

It did not disappoint. It didn’t disappoint. The headline inflation rate jumped to 6.2%. This was the highest level since 1990.

Data from the Commodity Futures Trading Commission for the week ending Nov. 9, shows that funds reduced their short position in 10 year Treasuries futures, by 1,337 to 267.332 contracts before the release.

It stopped the massive buildup of positions bettors on a 10-year higher yield. The October unwinding of 296052 contracts, which was the largest monthly swing in short-term positions since 2005 and the second most since contract launch in mid-80s, marked the third largest since then.

This week’s selling momentum was at its highest since March 2018 and, on a rolling basis for two months, 448,539 contract unwinds over October. November saw the biggest selloff.

TRAINING UNDER SCRUTINY

The Economists Barclays (LON: ) It is important to note that the uncertainty surrounding near-term inflation continues to be “unusually elevated”, as supply adjustments unfold. Following the release of new figures, inflation expectations have resumed their climb higher towards new highs.

They wrote that although they believe October’s CPI readings are too high, the report from last month illustrates uncertainty and volatility.”

The first of the two rate increases for the next year were not announced by the money markets in July. However, they did open up the possibility that a third 25 basis point rise could be made towards the year’s end.

It may become increasingly difficult to ignore the renewed rise in breakeven rates (the difference between yields from Treasury Inflation Protected Securities and nominal securities) for policymakers.

Following the October inflation statistics, benchmark breakeven rate rose in all cases, some in close to two decades.

In recent days, a growing number of former central bank and government officials including Larry Summers and Bill Dudley have called on the Fed to reconsider its current position. They believe it cannot afford to wait too long because inflation is “transitory”.

Although funds helped ease the pressure on 10 year Treasury curves, the latest CFTC data showed that their 5-year Treasury futures net short position increased by 31,132 to 407,485 contracts. It is the highest net shortfall of any year.

They also reduced their net short position in 2-year Treasury futures by 46,371 contracts, to 16,737. It is the lowest net shortage since mid-August.

The lack of one cohesive movement across the curve highlights market uncertainty, however funds seem to be reaping the benefits of increasing uncertainty and volatility.

Hedge fund data provider HFR reported that the benchmark HFRI Macro Index for Hedge Funds rose 1.46% in October. This is the first increase since May, and the fourth consecutive month of growth.

(By Jamie McGeever, Editing by Simon CameronMoore