"Hedge Funds' Record Increase in Net Shorts on Treasury Futures Amidst Confidence in US Economy"

 

Hedge funds are showing confidence in the US economy's ability to avoid a recession despite the impact of higher interest rates, according to recent data. The Commodity Futures Trading Commission's figures reveal that leveraged investors increased their net shorts on 10-year Treasury futures to a record 1.29 million contracts as of April 18, marking the fifth consecutive week that net shorts have risen. Hedge funds may believe that inflation will be more persistent than some market participants anticipate, leading to this Although Treasury yields have been volatile in recent weeks as traders dispute with the Federal Reserve over when policymakers will begin cutting rates, hedge funds could be correct if the US central bank prevails in its view that borrowing costs should continue to rise. Nevertheless, leveraged funds have a mixed track record with Treasuries. For instance, yields declined in 2019 after the previous record short. When leveraged longs hit a multi-year high in 2021, yields fell slightly before surging as the Fed moved closer to hiking rates.

The 10-year Treasury yield has climbed by nine basis points this month to 3.56%, reversing some of March's 45-basis-point drop. Although the benchmark yield remains at a significant discount to two-year rates, indicating a possible downturn, another explanation for the shifts could be the return of basis trades. Hedge funds purchase cash Treasuries and short the underlying futures in these trades, which involve purchasing bonds that have become relatively inexpensive compared to the underlying futures and then selling the futures to pocket the difference. The profit margin is generally modest, thus leverage is frequently used.

James Wilson, a senior portfolio manager at Jamieson Coote Bonds in Melbourne, believes that leveraged funds have more opportunities to earn profits by purchasing cash bonds and selling the underlying futures where arbitrage possibilities arise. He also said that "In a world of huge deficits and no more QE, leveraged funds have a lot more opportunities to reap profits by buying cash bonds and selling the underlying futures where arbitrage opportunities arise."