(In the first paragraph, corrects the reference to the last US rate hike to “first rate hike since 2018”.)
By Jamie McGeever
ORLANDO, Fla. (Reuters) – Hedge funds and speculators are ditching US Treasury bonds at a pace rarely seen before, a sign of the rapid acceleration in bets as the Federal Reserve will announce its first interest rate hike since 2018 .
Moreover, the latest CFTC positioning data does not reflect the surge in market-based inflation expectations to new highs and the largely hawkish remarks by Fed Chairman Jerome Powell at the end of last week. .
Given these factors, and the fact that federal funds futures now show traders believe the first U.S. rate hike will be in mid-2022, there’s a good chance that the funds’ bearish view is likely to occur. on Treasuries has tightened further.
Data from the Commodity Futures Trading Commission shows that the funds abandoned 156,586 10-year Treasury bill futures contracts and moved to a small net short position during the week through October 19. This is the biggest outcome since 2016 and the third since the launch of the contract. in the mid-1980s.
The funds have been mostly 10-year Treasury futures since June of last year, although never to a large extent. It remains to be seen whether this historic selloff marks a return to the previous two and a half years of consistently bearish sentiment.
CFTC data also shows the funds extended their net short position in two-year Treasury futures contracts of more than 92,000 contracts, the biggest sell-off since March.
It comes as the latest survey of Bank of America fund managers showed investors have never been so bearish on bonds since the poll was launched 20 years ago.
The size of the sell-off is important, especially in the 10-year part of the curve, and suggests that the debate over whether the rise in inflation is temporary has entered a new phase.
“Team Transitory” certainly took some hard hits last week.
Inflation break-even points on inflation-protected Treasury securities and inflation swap rates have reached levels not seen in several years.
On Friday, Powell said the risks were “clearly now related to longer and more persistent bottlenecks and, therefore, higher inflation,” and admitted that the current situation is not what the Fed’s “patient” approach was designed.
While he also pointed out that now is not the time to raise rates and that the Fed can be patient, this was just a reiteration of the Fed’s position – no Fed official is advocating rate hikes until much of next year.
BOLD OR QUIET?
Keep in mind that just a few weeks ago, federal funds futures showed the first rate hike in early 2023. This was brought forward to mid-2022, with another hike later. in the year now added for good measure.
A take-off in June or July, just when the Fed is expected to finish its bond buying phase, would be a pretty bold punch. Some might say reckless.
Certainly, the longer part of the bond market shows that investors are starting to consider the potential economic damage from an earlier start to the political tightening cycle.
The longer end of the curve flattens out, with the 20/30 portion of the curve within two basis points of the inversion, and the spread between 30 and 10 year returns is the smallest since almost two years.
This is a sign that tightening monetary policy today will slow growth tomorrow. The Atlanta Fed’s latest GDPNow tracker estimates the third-quarter annualized rate at just 0.5%, down from 6% a few months ago.
Economics professor and former Bank of England policy maker David Blanchflower and Professor Alex Bryson go further.
“Downward movements in consumer expectations over the past six months suggest that the United States economy is now entering a recession (fall 2021), although employment and wage growth figures suggest the opposite, ”they wrote in a discussion paper earlier this month.
Whether the economy decelerates or enters a recession, investors are betting the Fed is about to begin unwinding its bond buying program and then raising rates next year.
(Reporting by Jamie McGeever; editing by Diane Craft)