Column-Funds win once more with U.S. curve flatteners: McGeever

By Jamie McGeever

ORLANDO, Fla. (Reuters) – One other week, one other massive win for hedge funds betting on a flatter U.S. yield curve.

Futures market information for the week via Feb. 15 present that funds’ extending their bets on a narrower hole between two- and 10-year yields coincided with one of the dramatic 24-hour intervals on the quick finish of the curve in over a decade.

The tempo of flattening this 12 months, nevertheless, has been so speedy {that a} interval of consolidation might now be in retailer: in latest days the 2s/10s a part of the curve has begun to steepen, and frenzied rate of interest expectations have cooled. Barely.

The most recent Commodity Futures Buying and selling Fee report reveals that funds elevated their web quick place in two-year Treasuries by greater than 104,000 contracts to 115,758 contracts within the week via Feb. 15.

That’s the largest general web quick since October, and the weekly change marked probably the most bearish shift since final March. It was wholly pushed by liquidation of lengthy positions quite than funds opening contemporary quick positions.

(Graphic: CFTC Funds’ 2-Yr Treasuries Web Place – Weekly Change, https://fingfx.thomsonreuters.com/gfx/mkt/klpykmxzlpg/2YCFTCWEEKLY.png)

A brief place is basically a wager that an asset’s value will fall, and a protracted place is a wager it can rise. In bonds, yields rise when costs fall, and transfer decrease when costs rise.

The week in query covers Thursday Feb. 10, when figures confirmed U.S. inflation at a 40-year excessive of seven.5%, St. Louis Fed President James Bullard stated he had turned “dramatically” extra hawkish, and the two-year yield soared 24 foundation factors.

That was the largest one-day rise since 2009 and contributed to a 13-basis level narrowing of the unfold between two- and 10-year yields, the fourth greatest compression in a decade.

The 2s/10s curve flattened to 35 foundation factors on Feb. 14, the bottom since mid-2020. That is an more and more loud warning that the Fed might tighten coverage too aggressively and that the financial system may quickly stall and even tip into recession.

Different elements of the yield curve have flattened additional and a few elements of the charges futures curve have inverted. That is as a result of ratcheting up of expectations that the Fed will increase charges aggressively to chill inflation.

Economists at JP Morgan on Friday had been the newest to revise up their Fed outlook, to seven 25-basis level hikes this 12 months, whereas strategists at Credit score Suisse raised their 10-year U.S. yield forecast by 50 bps to 2.70%.

“We anticipate the curve to proceed to flatten, however imagine the extent to which flattening is already priced leaves little attraction to including additional publicity,” Credit score Suisse’s Jonathan Cohn stated.

Fatigue is perhaps setting in although. Final week was the primary in eight that the two-year yield declined week on week, though it was solely by a few foundation factors. Maybe markets are realizing that Bullard, the Fed’s most vocal hawk, doesn’t converse for the entire rate-setting committee.

Cash markets are now not absolutely pricing in not less than 150 foundation factors of tightening from the Federal Reserve this 12 months, and the two-year yield has come off nearly 20 foundation factors from its Feb. 10 excessive of 1.64%.

The CFTC report for the week via Feb. 15 additionally confirmed that funds minimize their web quick 10-year Treasuries futures holdings by 27,847 contracts to 174,063, the smallest since October.

Essentially the most eye-catching nugget was that this marked the third week in a row that funds added to their lengthy positions, one thing they haven’t completed since final Could.

This implies that the 10-year yield’s latest climb above 2% for the primary time since 2019 was engaging to traders who, with Russia and Ukraine on the point of conflict, had further incentive to purchase the most secure, most liquid asset on the earth.

There could also be life within the outdated bonds but.

(Graphic: CFTC Funds’ 10-Yr Treasuries Longs – Weekly Change, https://fingfx.thomsonreuters.com/gfx/mkt/mopanyxjgva/CFTC10YLONGS.png)

(The opinions expressed listed below are these of the writer, a columnist for Reuters.)

(By Jamie McGeever; Modifying by Lisa Shumaker)