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ORLANDO, Fla., March 15 (Reuters) – Hedge funds closed February holding huge short positions in short-term U.S. interest rate and Treasuries futures, positions that may have been crushed by the collapse in implied rates and bond yields following the Silicon Valley Bank crisis.
Commodity Futures Trading Commission (CFTC) data published on Tuesday shows that speculators held the largest net short position in three-month ‘SOFR’ rate futures since September, and the biggest net short 10-year Treasuries futures position since 2018.
While they trimmed their net short 2-year Treasuries futures position, it was only a reduction of around 5% from the record short a couple of weeks earlier. It remained substantial.
The CFTC positioning data is for the week ending Feb. 28, and is now only lagging by one week following a cyber attack on the derivatives platform of ION Group, which delayed trading firms’ reporting earlier this year.
The significance of these figures is the context of the last few days – the collapse of SVB prompting swift intervention from U.S. financial authorities on Sunday night, and an extraordinary decline in bond yields and market-based interest rates.
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If these positions were roughly maintained or even increased in the last couple of weeks, they could be deeply under water.
In the week through Feb. 28 funds expanded their net short position in three-month ‘Secured Overnight Financing Rate’ futures to 829,000 contracts, the largest since the record short of 1.06 million contacts last September.
6% HOPES EVAPORATE
The stampede until last week to position for rising U.S. interest rates was remarkable in its speed and scale – funds held a small net long position at the end of January.
The frenzy to bet on higher U.S. rates and yields saw the implied terminal rate reach 5.70% last week. BlackRock’s Rick Rieder said there was a “reasonable chance” the Fed could go as high as 6% and stay there for some time.
Many of those calls have now been reversed.
Funds increased their net short 10-year Treasuries position to 628,000 contracts, the largest since October 2018. They trimmed their two-year futures net short to 656,575 contracts – two weeks prior they were net short 696,686 contracts, a record.
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 and interest rates, yields and implied rates fall when prices rise, and move up when prices fall.
Hedge funds take positions in short-dated U.S. rates and bonds futures for hedging purposes and relative value trades, so the CFTC data is not reflective of purely directional bets. But it is a pretty good guide.
CFTC speculators might have significantly reduced these positions since Feb. 28. But if not, they are likely to have been blindsided by the recent market turmoil.
Consider, in the last few days we have seen: the biggest fall in the 2-year yield since Black Monday in 1987, the ‘2s/10s’ yield curve steepen 70 basis points but remain deeply inverted, and the highest Treasury market volatility since the Great Financial Crisis.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Related columns:
– Deeply inverted US curve flashed bank danger for months
– Hedge funds put record wager on higher 2-year U.S. bond yield
– Rates market overshoot – or no man’s land?
By Jamie McGeever; Editing by Simon Cameron-Moore
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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