Column: Funds pause record selling of 10-year Treasuries

Hedge funds paused their relentless selling of 10-year Treasuries futures ahead of last week’s U.S. consumer price data, but the spike in annual inflation to its highest in more than three decades suggests the hiatus could be a short one.

The October inflation report released on Nov. 10 was always going to be a biggie, potentially pivotal for the Fed in respect of when it starts raising interest rates and by how much over the coming years.

It didn’t disappoint. The headline rate of annual inflation jumped to 6.2%, the highest since 1990, and poured fuel on the already raging debate over whether the Fed is behind the curve.

Commodity Futures Trading Commission data for the week to Nov. 9 shows that funds trimmed their net short position in 10-year Treasuries futures by 1,337 contracts to 267,332 contracts ahead of the release.

This halted the huge build up of positions betting on a higher 10-year yield. October’s unwind of 296,052 contracts was the biggest monthly swing to short positions since 2005, and the second-largest since the contract’s launch in the mid-1980s.

Selling momentum the week before was its strongest since March 2018, and on a two-month rolling basis, the unwind of 448,539 contracts over October and so far in November marks the most intense selloff ever.


Economists at Barclays note that uncertainty about near-term inflation remains “unusually elevated” as supply adjustments play out. Inflation expectations resumed their grind higher to new peaks following the latest figures too.

“Although we think that October’s CPI readings overstate underlying inflationary pressures, last month’s report illustrates the ongoing volatility and uncertainty,” they wrote in a note on Monday.

Money markets did not bring forward the first of two rate hikes penciled in for next year from July, but opened up the possibility of a third 25-basis point increase toward year-end.

The renewed move up in breakeven inflation rates – the difference between yields on nominal and Treasury Inflation-Protected Securities – may be increasingly difficult for policymakers to ignore.

From one-year out to 30-year maturities, all benchmark breakeven rates rose to their highest in years – in some cases in almost two decades – following the October inflation data.

A growing phalanx of leading former government and central bank officials, including Larry Summers, Bill Dudley and Willem Buiter, in recent days have urged the Fed to rethink its position that it can afford to sit it out a bit longer because inflation is ‘transitory’.

While funds eased the pressure on the 10-year part of the curve, the latest CFTC data show they increased their net short position in 5-year Treasury futures by 31,132 contracts to 407,485 contracts. That is the biggest net short in a year.

On the other hand, they cut their net short 2-year Treasury futures position for a third week, by 46,371 contracts to 16,737. That is the smallest net short since late August.

This lack of a cohesive move across the curve highlights the uncertainty hanging over the market, but funds appear to be enjoying the fruits of rising 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 October increase in four years.