By Jamie McGeever
ORLANDO, Fla. – Ahead of the Fed’s policy meeting last week, hedge funds sold Treasuries, positioned for a steeper 2s/10s yield curve, and increased their bullish bets on the dollar.
Going by markets’ initial reaction to the Fed’s hawkish turn, the combination play was perfectly timed.
The question now is whether this really is the beginning of a sustained move up in yields and steepening of the curve, or yet another false dawn.
Data from the Commodity Futures Trading Commission show that hedge funds and speculators in the week to Sept. 21 cut their net long 10-year Treasuries holdings by more than half and added to their net short position in the 2-year bonds.
They reduced their net long 10-year holdings by 68,202 contracts to 61,221. This followed a large swing the other way the week before, and came just before the Fed indication that it will start tapering its bond purchases “soon” triggered a jump in yields and rise in bond market volatility.
At the same time, they were net sellers of a much more modest 5,768 contracts in the 2-year space to increase their net short position to 30,401 contracts. This bet on a “bear steepening” of the curve, driven by more aggressive selling of the longer-dated issue, looks to be in the money.
The curve steepened by more than 10 basis points the day after the Fed meeting, the most in 18 months and one of the biggest steepening moves in years. At 118 bps, the curve is now its steepest in two and a half months.
