Column: Funds lose nerve on higher U.S. yields bet ahead of Fed

September 20, 2021

By Jamie McGeever

ORLANDO, Fla. (Reuters) – Funds are loading back up on U.S. Treasuries ahead of the Fed’s Sept. 22 policy decision, suggesting they are not as confident as they were a few weeks ago that yields are headed higher.

Positioning data from the Commodity Futures Trading Commission show hedge funds and speculators in the week to Sept. 14 bought the most 10-year Treasuries futures since April.

They added 128,643 contracts to their net long position, reversing the historic shift in the opposite direction only two weeks earlier. In more than three decades of weekly CFTC data, funds have hoovered up as many contracts as that only 10 other times.

This comes ahead of the Fed’s meeting on Wednesday where it is expected to open the door to reducing its monthly bond purchases, but push back announcing the actual details until November or possibly December.

That’s because recent economic data has been soft, most notably the August employment report which showed a huge miss on net new jobs relative to consensus forecasts.

Other indicators have undershot forecasts, the U.S. economic surprises index slumped to the lowest since June last year, growth forecasts have been ratcheted down, and Wall Street has wobbled. Against that backdrop, it may be little coincidence that funds have piled back into 10-year Treasuries.

The demand for longer-dated bonds has not been mirrored at the shorter end, according to CFTC positioning data, indicating a “bull flattening” of the 2s/10s yield curve.

Funds reduced their net short position in 2-year Treasury futures in the week to Sept. 14 to 24,633 contracts from 65,257 contracts the week before.

The curve did indeed flatten to 106 basis points, the flattest in three weeks. But it has since widened back out, thanks to the 10-year yield spiking to 1.38% on Friday, the highest in two months.

Could funds find themselves flat-footed? As Steve Major at HSBC points out, the 10-year yield just above 1.30% is broadly in the middle of its 0.91%-1.74% range this year. So the market is delicately poised.

Much will depend on the Fed on Wednesday and the strength, or otherwise, of incoming economic data, particularly the September jobs report. Major is sticking with his 1.0% year-end forecast for the 10-year yield, much lower than most others.

Macro funds appear to share his skepticism, however, that yields will go much higher. For the most part, they have been long of Treasuries for the past year or more.

But they will be hoping for some kind of fireworks from the Fed on Wednesday. They had a good second quarter, but are banking on a pickup in volatility to maintain that performance into year-end.

(By Jamie McGeever; Editing by Lisa Shumaker)

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