Into last week’s push higher in Treasury yields, new short risk was created. The latest positioning points to hedge funds building their short base, widening the divergence with asset managers taking the other side of the trade in long positions.
(Bloomberg) — Into last week’s push higher in Treasury yields, new short risk was created. The latest positioning points to hedge funds building their short base, widening the divergence with asset managers taking the other side of the trade in long positions.
Along with the move higher in yields, the broad increase in open interest points to fresh short positions, according to Bank of America. Meanwhile, JPMorgan’s latest Treasury client survey showed short positions gaining in the cash bond market, rising to the most on an outright basis since May 1.
In options skew, the cost of insuring against a rise in long-end yields relative to the front-end and belly of the curve has surged over the past week as the Treasuries curve has aggressively bear steepened.
Here’s a rundown of positioning in various corners of the bond market:
Hedge Fund, Asset Manager Division Extends
The disparity in short vs. long positioning between hedge funds and asset managers continues to grow, shown by latest CFTC positioning data with hedge funds adding 176,000 10-year futures equivalent to net short and asset managers taking the other side, adding 137,000 10-year futures equivalent to net long. To be sure, CFTC positioning data can also reflect participation in basis trades and therefore muddling a duration bias.
Rising Open Interest
Into last week’s Treasury market selloff, which saw 10-year yields peak through 4.20% and hit the cheapest levels since November, open interest (amount of risk held by investors) rose — an indication of new short positions.
Cost of Long-End Hedges Surge
The past week has seen an explosion in long-end rates volatility, with the cost of hedging a selloff in the 30-year tenor blowing out relative to belly and front-end of the curve. In Treasury options, upside hedges have emerged in both 10- and 5-year tenor which covers a significant move lower in yields ahead of Friday expiries.
Activity in SOFR options this week has seen demand for downside protection for the end of next year and into 2025. Specifically the December 2024 and December 2025 tenors have been targeted Monday and Tuesday, in positions which stand to benefit from a Federal Reserve policy rate higher for longer and subsequently fading the amount of cuts being priced for next year and beyond.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.