Bearish bets against US Treasuries climb to new record

Big short positions accompany a steep sell-off in US government debt

The amount of money making bets that US Treasuries will fall in value climbed to a new record high over the last week in a wager that faster US economic growth and higher inflation will weigh further on government bond prices.

So-called “non-commercial” speculative positions selling the 10-year Treasury futures contract have been rising since the US presidential election and hit 816,156 contracts in the week to January 3, outnumbering long positions by 344,931 — a record level — according to fresh data from the Commodity Futures Trading Commission on Friday.

The bearish tilt has accompanied a steep sell-off in US government debt since the US election, which has unleashed pent-up animal spirits among investors and driven equity markets higher, on the expectation that a looser regulatory regime and lower taxes will spur growth and rekindle inflation.

“There are big shorts out there,” said Michael Cloherty, a strategist at RBC Capital Markets. “We see it in the futures data and we see it in the cash market too.”

The CFTC data applies to outright, speculative positions termed non-commercial. Commercial positions related to hedging activity continued to rise for the same 10-year Treasury contract, hitting a record long position of 549,000 contracts.

More granular data shows asset managers continuing to buy the 10-year contract, but more aggressively buying the 5-year Treasury future, as fears about rising rates push them into shorter, less rate-sensitive products, said John Brady, managing director at RJ O’Brien.

Even having fallen 18 basis points in the past three weeks, Treasury yields have climbed 56 basis points since the election to 2.42 per cent alongside a renewed rally in US stock markets. On Friday, the Dow Jones Industrial Average came within a hair of the 20,000 point level while the S&P 500 set a new record.

Speculative short positions will pay off if rates continue to rise. It also offers protection against a sharp, more unexpected rise in rates that could hurt equity markets. Leveraged accounts — a proxy for hedge funds — have built a net short position in the 10-year contract since November, but it is even more pronounced in the 5-year future, taking the opposite side of asset managers buying activity.

“The animal spirits are coming back,” said Mr Brady. “If you believe that, then being short 5-year futures offers nice protection in case that view doesn’t work out.”

President-elect Donald Trump’s ability to reinvigorate growth has fuelled a wide market rotation and upended the expectations of many Federal Reserve policymakers. In the central bank’s most recent minutes, almost all Fed officials said that the risk of economic activity surpassing their forecasts had increased on the prospect of more expansionary fiscal policies.

Investors have taken heed of the Fed’s view and the possibility that it may lift interest rates three times this year. Alongside the sell-off in both short- and long-dated Treasuries, federal funds futures have priced a near 40 per cent chance that interest rates climb at least that amount. And while that is below the 47 per cent odds recorded after the Fed released its December statement, it is eight-times greater than the odds implied on election night.

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