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Hedge Funds Pivot Away from Bearish Treasury Bets as Markets Transition
(Bloomberg) -- In a significant turn of events within the financial markets, leveraged funds have been actively unwinding their short-duration positions in Treasury futures. This trend has been particularly pronounced among hedge funds, which are taking advantage of the opportunity to cash in on their bearish strategies amid persistently elevated Treasury yields. However, this is not the sole factor at play. The unwinding of these positions may also signal a tempering of activity linked to the futures-versus-cash basis trade, a nuanced strategy closely watched by market participants.
Analysts have observed that the recent reduction in bearish positions aligns with shifts in market conditions and the structural aspects of trading futures. Positioning data from the Commodity Futures Trading Commission (CFTC) as of February 27, 2024 reveals that asset managers have reduced their net long positions in 10-year note futures equivalents by an aggregate of 830,000 contracts. Conversely, leveraged funds have scaled back their net duration shorts by an approximate equivalent of 825,000 10-year futures.
One cannot ignore the impact of the basis unwind narrative which has been supported by the measured actions of these asset managers. Their consistent position cuts over a four-week span highlight a broad reassessment of the market's direction, as reflected in the CFTC data. Subsequently, hedge funds have lessened their net duration shorts to a level not witnessed since the summer of the previous year. Similarly, asset managers have moderated their stances to mirror their least long positions since August 2023.
To further comprehend this market shift, it's essential to consider the context provided by Deutsche Bank, positing that the Treasuries basis trade is showing signs of fatigue. The basis trade involves exploiting pricing discrepancies between the futures market and the underlying cash securities market. Any moderation in such activities inevitably triggers a ripple effect, compelling traders to recalibrate their positions.
Furthermore, the unwinding trend is not isolated to mere adjustments in trading strategy. It coincides with the roll period from March to June in the Treasury futures market, which involves the transition of contracts to new front-dated ones. This procedural nuance suggests that the current deleveraging phase by hedge funds may soon pivot, potentially giving rise to a renewed accumulation of short positions in the newly front-dated June futures contracts.
Another facet of the market's evolution is reflected in data gleaned from JPMorgan's recent survey of Treasury clients. The week leading up to March 4th witnessed a marked increase in long positions, attaining the highest level observed in a month. This movement indicates a strategic shift away from previously held neutral positions within the cash market.
A detailed analysis of leveraged fund movements illustrates the breadth of the strategic unwind. According to CFTC positioning data up to February 27, hedge funds embarked on their most substantial wave of short position covering since November 2023. This aggressive coverage, involving approximately 308,000 10-year note futures, culminated in a net duration short that echoed the low levels seen in the previous July.
Simultaneously, asset managers mirrored the hedge fund's pivotal shifts. The most recent data unveiled a drop in their net long positions that closely paralleled the unwinding activity of hedge funds, with declines estimated at roughly 307,000 10-year note futures. The convergence in the strategies of these two influential trader categories underscores a significant realignment in market sentiments.
Further reflection is warranted on the burgeoning confidence within the cash market. As per the JPMorgan Treasury client survey, the week concluded on March 4th saw a 4 percentage point climb in longs, topping the charts since the start of February. Meanwhile, short positions increased by 3 percentage points, and neutral positions dipped by 7 points, underscoring a more active and bias-based market stance.
A less discussed, yet revealing domain is the options market, particularly concerning long-term Treasury bonds. Here, the options skew on long-bond futures softened, pointing to traders showing less urgency in hedging against a potential selloff. This change is corroborated by the easing cash yields on long bonds, which have declined following an unsuccessful push beyond the 4.50% threshold. From its peak on February 22, the 30-year yield notably retreated from its high of 4.499% to a more moderate 4.255% by late Tuesday.
A further dive into the activities within the SOFR options market reveals interesting dynamics. Over the previous week, the 95.50 strike across Mar24, Jun24, and Sep24 tenors hosted a significant volume of transactions. The majority of this positioning derived from the Jun24 and Sep24 calls, featuring notable activities such as large buyers engaging in the SFRM4 95.50/95.75 call spread and the SFRM4 95.25/95.50/95.75 call fly. This concentrated focus on particular strikes provides valuable insights into market expectations and hedging behavior.
Examining the SOFR options landscape reveals a concentration on the 95.00 strike or the 5% rate out to the Sep24 tenor. This strike retains a substantial volume of Mar24 calls. Other strikes that have caught traders' attention include the 94.875 and 94.75, along with the 95.25 strike, which holds a significant amount of positions. This strategic placement of options positions illustrates a calculated approach by market participants, giving importance to specific rate levels.
The developments delineated above encapsulate a market in the midst of transition. As market forces and strategic trading continue to shape the landscape, the actions of leveraged funds, asset managers, and options traders provide a barometer for the evolving dynamics of the financial markets. The balance between futures and cash, positioning recalibration, and the opportunistic plays within the options arena offer an intricate mosaic of the market's pulse.
In conclusion, with leveraged funds adopting a more cautious stance and Treasuries clients tilting towards bullish bets, the market stands at a critical juncture. The juxtaposition of these developments showcases a market that is both reflective and anticipatory, offering myriad possibilities for adept investors and analysts to discern. As we forge ahead, the interplay between Treasury yields, basis trades, and positioning adjustments will continue to define the contours of market strategy and influence the trajectories of investment decisions.
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