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ORLANDO, Fla., Oct 4 (Businesshala) – Hold your cap if hedge funds move on the dollar and there is a season for U.S. Treasury investors’ risk appetite and the economic outlook more broadly.
Chicago futures market data shows he has made his biggest long position on 10-year US government notes in four years and his multi-billion dollar bet on a strong greenback to his biggest in 18 months .
These trades – banking on lower long-term borrowing costs, a flatter yield curve and a stronger dollar – indicate concern over future growth prospects, a strong desire for safety or a lack of concern over inflation. Or all three.
Data from the Commodity Futures Trading Commission shows that hedge funds and speculators increased their net long 10-year Treasury holdings from about 120,000 contracts to 181,207 contracts in the week to September 28, the highest since October 2017.
This is the first glimpse of how hedge funds have been re-evaluating interest rate risk since the Federal Reserve’s September 22 policy meeting, which opened the door to a more aggressive tightening process than previously thought.
Fund crowding in the 10-year Treasury completely reversed its sell-off ahead of the meeting, and coincided with a slump in financial markets as investors grappled with the prospect of a hike in interest rates next year.
Speculative accounts doubled their net short two-year Treasury futures position to 62,829 contracts, reflecting the Fed’s bullish lean.
So far at least, that bet isn’t paying off: The 10-year yield jumped to 1.55% this week from 1.30% on the day of the Fed’s policy statement, and the two-year/10-year yield curve rose 15 basis points to 125. up to bps.
But alarm bells are ringing. The S&P 500 declined 5% for the first time in nearly a year, and September recorded its biggest monthly decline since March last year; VIX index jumped above 20; US consumer sentiment has hit a seven-month low and prospects for near-term growth are slim.
It’s the kind of environment that favors bonds, a flatter yield curve, and the dollar. On that final note, at least, the money is on the winner.
CFTC data shows he increased his net long dollar holdings for the 11th consecutive week from about $2 billion to $15.3 billion. This is the biggest since March last year.
The dollar strengthened for the fourth straight week and rose to an 11-month high against a basket of currencies, fueled by short-term real yields, safe-haven demand and a hike in ultra-short-dated bill rates on the back of US debt limits. . deadlock
The dollar often performs well in times of slow growth and increasing economic uncertainty. Visually, it appears counter-intuitive, but the dollar provides security and liquidity in the relative world of exchange rates.
The pace of domestic US and global growth is slowing. Barclays economists note that the slowdown in business investment amid renewed Covid-19 infections, ongoing supply constraints and a cautious consumer is in line with a slowdown in demand.
His third-quarter GDP tracker closed last week at 3.4%, suggesting further downside risks to his official forecast of 4.5%.
Although, of course, the hottest issue for investors is inflation. Are the current highs fleeting, as the Fed is still pushing? Do the cards have a more damaging, long-lasting overshoot? And more pertinently, what will the Fed do?
For all the discussion of inflation, some of the major inflation expectations measures offer a different view.
Inflation rates have been higher across the curve since the Fed’s September 22 meeting, but they are still well below where they were in the prior year. Since then the price of inflation-protected Treasury bonds, or TIPS, has also declined.
Goldman Sachs economists raised their 2021 forecast for core PCE inflation – the Fed’s preferred measure – to 4.25% from 3.9%. But his last-year estimates for the next three years are 2.00%, 2.15% and 2.20% – hardly any runaway inflation.
It’s the kind of outlook that suggests that the current price pressure will indeed prove to be temporary, which hedge funds and speculators – at least for now – seem to be buying into.