HomeEconomic IndicatorFunds Increase Bets on Strong Dollar and Lower Treasury Bonds: McGeever

Funds Increase Bets on Strong Dollar and Lower Treasury Bonds: McGeever

Hedge Funds Double Down on Short Treasuries and Long Dollar Bets

Hedge Funds Show Strong Conviction in Short Treasuries and Long Dollar Trades

Hedge funds have entered the final quarter of the year with a strong conviction in two of their biggest macro trades – short U.S. Treasuries and long the dollar. Speculators are maintaining a record short position in two-year Treasuries, while also being the most bullish on the dollar in a year.

Funds Look to Accelerate Momentum of Profitable Trades

Hedge funds are looking to capitalize on the momentum of these trades into year-end, as they have proven to be extremely profitable over the last couple of months. The increase in funds’ short Treasuries position indicates they are in no hurry to scale back their ‘basis trade’ bets, which leverage arbitrage opportunities between cash bonds and futures.

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Bullish Dollar Bets Expand as U.S. Bond Yields Rise

With U.S. bond yields reaching their highest levels since 2006 and maintaining a significant gap over other countries’ yields, funds are expanding their bullish dollar bets at the fastest rate since May last year.

Latest CFTC Data Reveals Notable Findings

The latest Commodity Futures Trading Commission (CFTC) data for the week ending October 3 highlights some key trends. Hedge funds have grown their net short position in two-, five-, and 10-year Treasury contracts by a combined 138,000 contracts, with the majority in the two- and five-year space. The net short position in two-year futures has reached a record 1.278 million contracts.

Understanding the Basis Trade and its Impact

Funds play bond futures for various reasons, including relative value trades. This year, the ‘basis trade’ has garnered attention from policymakers and regulators concerned about the potential market impact of a sudden unwind. Leveraged funds have increased their combined net short position in two-, five-, and 10-year Treasuries futures, reaching 4.46 million contracts.

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Currency Market Developments

In the currency market, hedge funds have ramped up their net long dollar position by $5.4 billion in the week to $8.45 billion. This increase has been driven by bearish swings in the dollar’s major rivals, such as the euro, the Japanese yen, and sterling.

Net Long Euro Position Decreases, Yen Position Remains Vulnerable

The net long euro position has been reduced to 79,000 contracts, the lowest in nearly a year. Hedge funds have also increased their net short yen position, nearing July’s biggest net short position since February 2018. The potential impact of a yen rally due to changes in the Bank of Japan’s monetary policy poses a significant risk to funds’ yen position.

Sterling Position Flips to Net Short

Recent weeks have seen hedge funds flip to a net short sterling position for the first time since April. The selling momentum in sterling is now the strongest in a year, as indicated by momentum indicators.

Profitable Trades Boost Hedge Fund Performance

The profitable nature of these trades is reflected in the positive performance of hedge funds. The HFRI Macro (Total) index rose by 2.3% in September, the best performance since April last year, while the HFRI Macro Multi-Strategy index jumped by 3.1%, its best month since February 2021.

Author’s Perspective

The author, Jamie McGeever, presents these findings as an observer and columnist for Reuters. The opinions expressed in this article are those of the author and do not reflect the views of any specific website or organization.

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