Hedge fund bond split may signal end of Fed cycle

NEW YORK: The last time hedge funds and asset managers were this split on the future for benchmark treasuries was when the US Federal Reserve’s (Fed) tightening cycle was about to peak in late 2018.

According to the latest data from the Commodity Futures Trading Commission net-short leveraged fund positions in 10-year futures have grown to their largest since 2019.

Their more bullish institutional investor counterparts, however, have seen net long positions climb to a record in data going back to 2006.

Treasuries have rebounded this year on bets that the Fed will soon call an end to the harshest rate hikes in a generation.

That may be fuelling fast-money funds’ purchases of short 10-year notes against their shorter-dated counterparts on the expectation that the deeply inverted yield curve will soon begin to steepen.

At the same time, buy-and-hold investors like asset managers are being lured by the highest interest payments on benchmark notes in more than a decade.

“A bullish theme has been building in rate markets, with a growing consensus that the Fed is close to done with rate hikes,” said Andrew Ticehurst, a rates strategist in Sydney at Nomura Inc.

“The perception is that its future actions may not be as hawkish as current communications suggest, in other words, its bark may be worse than its bite.” — Bloomberg

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