ORLANDO — Hedge funds focused on the two- and five-year segments of the US Treasury bond market to express their growing conviction that slowing economic growth will reduce the amount of inflation-busting policy tightening needed from the Federal Reserve.
This chimes with recent comments from some policymakers that the Fed will likely raise rates by another 50 basis points in June and July before taking stock in September to analyze the incoming data and assess how to proceed.
The latest Commodity Futures Trading Commission report on Treasuries futures positioning shows that in the week to May 24 speculators cut their net short position in two-year bonds by the most in over a year, and slashed their net short position in the five-year space by the most in over two years.
Funds’ two-year Treasuries net short position shrank by almost 100,000 contracts to 35,293, the smallest since February. It marked the biggest weekly reduction since February last year.
Funds cut their five-year Treasuries net short position by almost 140,000 contracts to 120,527, also the smallest since February, but that was the most bullish week-on-week since March 2020.
Three quarters of that net change was driven by funds establishing fresh long positions, perhaps an indication of a more fundamental shift in view.
“Bonds are returning to investors’ portfolios as a hedge asset once more – higher rates be damned,” Deutsche Bank’s fixed income strategists wrote in their weekly outlook.
A short position is essentially a bet that an asset’s price will fall, and a long position is a bet it will rise. In bonds, yields fall when prices rise, and move up when prices fall.
Atlanta Fed President Raphael Bostic has been the most forthright about a potential reassessment later this year, saying he is in favor of a “pause” at the September meeting.
The two-year yield fell around 20 basis points to 2.50% in the week covered by the latest CFTC data, and the five-year yield fell a similar amount to 2.75%. Short-term rates futures began to almost fully price in a quarter -point rate cut in the second half of next year.
The ICE BofA Treasury Index is on course for a monthly rise in May, the first in six months and the first sign of recovery following the worst start to a year in its history.
“Bond yields are starting to look attractive from a historical perspective, particularly in the US,” Unicredit strategist Elia Lattuga wrote on Monday. “Recession fears might further fuel the call to rotate towards bonds.”
– Another leg lower? Markets not yet braced for recession (May 27)
– Hedge funds position for US growth slump, rates peak (May 22)
– If Fed has to choose, markets could get much uglier (Reuters, May 20)
(By Jamie McGeever; Editing by Bernadette Baum)