(The views expressed here are those of a columnist writer for Businesshala.)
ORLANDO, Fla., Nov 16 (Businesshala) – Hedge funds halted their relentless selling of 10-year Treasury futures ahead of last week’s US consumer price data, but from a spike in annual inflation to the highest level in more than three decades. Turns out that the gap might be a small one.
The October inflation report, released on November 10, was always going to be a big, potentially important one for the Fed, when it starts raising interest rates and by how much in the years to come.
It didn’t disappoint. The headline rate of annual inflation jumped to 6.2%, the highest since 1990, and added fuel to an already ongoing debate over whether the Fed is behind the curve.
9 November data from the Commodity Futures Trading Commission for the week showed the funds reduced their net short positions in 10-year Treasury futures from 1,337 contracts to 267,332 contracts ahead of release.
This prevented the huge creation of positions betting on high 10-year yields. The opening of 296,052 contracts in October was the largest monthly swing for short positions since 2005, and the second largest since the contract’s launch in the mid-1980s.
The week-ago selling momentum was the strongest since March 2018, and marks the opening of 448,539 contracts in October and the sharpest sell-off ever in November, on a two-month rolling basis.
‘Transitory’ under investigation
Barclays economists noted that uncertainty about near-term inflation remains “abnormally increased” due to supply adjustments. Inflation expectations resumed their highs at new peaks even after the latest data.
“While we believe October’s CPI readings outweigh underlying inflationary pressures, last month’s reports reflect ongoing volatility and uncertainty,” he wrote in a note on Monday.
Currency markets did not bring forward the first of the two rate hikes set for next year from July, but left open the possibility of a third 25-basis point hike at the end of the year.
A fresh hike in break-even inflation rates — the difference between the nominal and the return on Treasury inflation-protected securities — may be hard for policymakers to ignore.
One year to 30-year maturities following the October inflation data, all benchmark breakeven rates hit their highest levels in years – in some cases nearly two decades.
A growing number of prominent former government and central bank officials, including Larry Summers, Bill Dudley and Willem Buiter, have urged the Fed to reconsider its position in recent days, saying it can afford to let it sit out for a bit longer as inflation increases. is ‘transient’. ,
While the fund eased pressure on the 10-year portion of the curve, the latest CFTC data shows they increased their net short positions in 5-year Treasury futures from 31,132 contracts to 407,485 contracts. This is the biggest net short in a year.
On the other hand, he reduced his net short 2-year Treasury futures position from 46,371 contracts to 16,737 for the third week. This is the shortest net short since the end of August.
The lack of a consistent move across the curve highlights the uncertainty hanging over the market, but funds are enjoying the fruits of increased uncertainty and volatility.
Hedge fund industry data provider HFR’s benchmark HFRI Macro Index rose 1.46% in October, the first gain since May and the first rise in October in four years.