ORLANDO, Florida, May 1 (Reuters) – Hedge funds are doubling down on their wager that the US yield curve will steepen and have extended their short positions in 5-year and 10-year Treasuries futures to historic levels.
The ‘bear steepener’ trade – where heavy selling of longer-dated bonds widens the yield gap over shorter-dated maturities – is one speculator in US futures have had on since the turn of the year.
But apart from a dramatic spike in March triggered by the US banking shock that month, yield curves have flattened as the broader market continues to bet that a looming recession will force the Fed to cut rates this year and next.
It has been a money-losing bet.
Commodity Futures Trading Commission (CFTC) data for the week ending April 25 show that speculators increased their net short position in 5-year Treasuries by almost 115,000 contracts to a record 869,288 contracts.
That was the biggest weekly increase in bearish bets this year.
Funds also increased their net short position in 10-year bonds for a fourth straight week, by just over 60,000 contracts to 740,261. That’s the biggest aggregate bearish bet in five years and just 16,000 away from a new record.
At the same time, funds trimmed their net short position in two-year Treasuries futures by 28,607 contracts, the biggest reduction in a month.
A short position is essentially a wager that an asset’s price will fall, and a long position is a bet it will rise. In bonds, yields rise when prices fall, and move lower when prices increase.
Hedge funds take positions in bonds futures for hedging purposes and relative value trades, so the CFTC data is not always a reflection of purely directional bets.
The cumulative CFTC positioning data this year, however, show that hedge funds’ collective ‘curve steepener’ bet has been significant.
They have increased their net short position in the five-year space by more than 200,000 contracts, and by almost 400,000 contracts in the 10-year space. Meanwhile, they have trimmed their two-year bond net short position by a negligible 4,338 contracts.
These figures show speculators are betting heavily on five- and 10-year yields rising relative to the two-year yield. But so far this year the 2s/5s curve has moved to -55 basis points from -45 bps, and the 2s/10s curve has gone to -61 bps from -55 bps.
This has contributed to the poor performance of macro hedge fund strategies this year. HFR’s Macro (Total) Index fell 2.95% in the first quarter, its worst quarter in eight years and the seventh worse since the index was launched in 1990.
Macro systematic funds, which place their bets based on algorithmic and technical models, fell 6.7% in March, its worst month in over five years, Bank of America said. HFR’s Macro Systematic Diversified Index fell 4.53% in Q1, on the back of a 5.72% fall in the October-December period last year.
(Reporting by Jamie McGeever; editing by Josie Kao)