Hedge funds have cut their short position in 10-year Treasury futures by nearly two-thirds from a one-year high set at the start of March, unwinding a popular trade as US sovereign debt has rallied.
Leveraged funds, a proxy for hedge funds, reduced their net short in 10-year Treasury futures by nearly 49,000 contracts in the week to April 4, data from the Commodity Futures Trading Commission showed on Friday. The net short totaled 136,322 contracts, down from 365,650 contracts on March 7.
Traditional asset managers, who have taken the opposite side of the trade, have also reduced their net long to 226,655 contracts, the lowest level since February.
The divide has represented in part a difference of opinion on the likely path of interest rates in the US. It widened markedly after the Federal Reserve signalled last year that it would tighten policy by at least three quarter-point rate rises in 2017.
The central bank’s perceived hawkishness, alongside a sell-off in Treasuries after the US election, sent yields on the 10-year Treasury to a high of 2.62 per cent in December. Yields on the note have since slid, as the so-called Trump trade fades.
One week after we observed the biggest monthly short squeeze in 10Y TSYs in history, it was a relatively calm week in the longer-end of the Treasury curve.
According to the latest CFTC data, spec net shorts in aggregate Treasury futures was little changed from the previous week at 612K contracts in TY equivalents. While, they continued to pare net shorts in TU and TY by 18K and 14K contracts, respectively, they increased their net shorts in FV and TN by 35K contracts and 6K contracts, respectively. Spec net shorts as share of open interest was unchanged at -5.8% over the week and was at about -2.0 standard deviations away from neutral.
While net Treasury futures shorts are now back to the lowest levels since early December 2016, traders continued to pile into the short-end betting massively on further rate hikes as Eurodollar shorts push on beyond $3 trillion: in the last week specs sold another 73K contracts in Eurodollar futures, taking their net shorts to the seventh successive week of record high of -3,129K contracts.
The stage is set for the first official summit between two of the world’s most powerful leaders as China’s president Xi Jinping travels to Florida to meet his US counterpart Donald Trump next week.
Also competing for investors’ attention will be minutes from the Federal Reserve’s March 14-15 meeting, the second televised debate of the French presidential election and the release of the closely watched US jobs report.
Here is what to watch in the week ahead:
Xi, meet Trump
The leaders of the world’s first- and second-largest economies will meet at Mr Trump’s Florida retreat, Mar-a-Lago, April 6 and 7. According to the official White House release, the agenda will include “global, regional, and bilateral issues of mutual concern”.
That vague description belies the complex backdrop against which the two men will meet. Mr Trump pledged during the presidential campaign to label China a currency manipulator, and within weeks of his election prompted a formal protest from China after his phone call with Taiwan’s leader (Mr Trump has since said he will back the ‘One China’ policy to ease tensions.)
Ghana’s central bank has cut its main policy rate by 200 basis points this month after the west African economy saw a drop in inflation at the start of the year.
The move to lower rates to 23.5 per cent marks only the second rate cut since 2011 after interest rates were trimmed back in November. Analysts polled by Bloomberg had forecast no change this month.
Inflation has now fallen for five consecutive months allowing policymakers to cut rates to their lowest since August 2015. Still, at 13.2 per cent the annual pace of price growth remains above the Ghanaian central bank’s 8 per cent target rate.
During the last 129 months, the Fed has held 86 meetings. On 83 of those occasions it either cut rates or left them unchanged.
So you can perhaps understand why Wednesday’s completely expected (for the last three weeks!) 25 bips left the day traders nonplussed. The Dow rallied over 100 points that day.
Traders understandably believe that this monetary farce can continue indefinitely, and that our Keynesian school marm’s post-meeting presser was evidence that the Fed is still their friend.
No it isn’t!
Our monetary politburo has expanded its balance sheet by a lunatic 22X during the last three decades and in the process has systematically falsified financial asset prices and birthed a mutant debt-fueled of simulacrum of prosperity.
But once it begins to withdraw substantial amounts of cash from the canyons of Wall Street as per its newly reaffirmed “normalization” policy, the whole house of cards is destined to collapse.
There will be a stock market implosion soon, and that will in turn generate panic in the C-suites as the value of stock options vanish. Like in the fall of 2008 — except on an even more sweeping and long-lasting scale — corporate America will desperately unload inventories, workers and assets to appease the robo-machines of Wall Street.
But there is nothing left to brake the casino’s fall.
With a rate rise in the books investors get to hear from a handful of Federal Reserve speakers next week. On the geo-political front a hearing on Russia’s interference in the US presidential election and a meeting on combatting Isis take the spotlight.
Here’s what to watch in the coming days.
While the Federal Reserve decided to raise interest rates for the third time since the financial crisis, chair Janet Yellen reiterated that the pace of rate rises would be gradual and the so-called dot plot continued to signal just two additional rate rises this year. The move was interpreted by some as a dovish hike and Fed speakers could get the chance to refute that next week.
“Moreover, we’d also look for clarification on the addition of ‘symmetric’ in the press statement when it came to defining the inflation reaction function,” strategists at RBC Capital Markets said. “Our sense is that this was in an effort to put an end to inflation level targeting—also not a dovish development.”
Ms Yellen will deliver the opening keynote at the Federal Reserve System Community Development Research Conference in Washington on Thursday. Through the week, investors also get to hear from voting members of the monetary policy setting Federal Open Market Committee, including Chicago Fed president Charles Evans, Dallas Fed president Robert Kaplan and Minneapolis Fed president Neel Kashkari — the only voting FOMC member to dissent at the March meeting and who has explained his rationale for the move on Friday.
On the economic data front, the calendar is fairly light but investors will keep an eye on fourth quarter current account deficit figures due Tuesday and durable goods orders slated for Friday.
As we reported on Wednesday evening, something interesting took place on Thursday morning in Beijing: in a case of eerie coordination, China tightened monetary conditions across many of the PBOC’s liquidity-providing conduits just 10 hours after the Fed raised its own interest rate by 0.25% for only the third time in a decade.
The oddly matched rate hikes, prompted Bloomberg to think back to the mysterious “Shanghai Accord” of February 2016, which took place during the peak days of last year’s global capital markets crisis, and whose closed-door decisions – to this day kept away from the public – prompted the market rally that continues to this day. As Bloomberg wrote, the coordinated “response suggests that pledges by the Group of 20 economies a little over a year ago in Shanghai to “carefully calibrate and clearly communicate” policies may not have been hollow after all.”
That said, it was not the first time the People’s Bank of China has acted on the heels of a Fed move. At the peak of the financial crisis, the PBOC cut lending rates after six of its counterparts, including the Fed, had announced a simultaneous rate cut. That October 2008 move enhanced China’s emerging reputation as a global player on the international economic-policy circuit. “Growth divergence is morphing into growth synchronization,” said Chua Hak Bin, a Singapore-based senior economist with Maybank. “Policy divergence was also a narrative for those expecting a strong dollar, but that is moving now to policy synchronization.”
Coordinated or not, as of last night financial conditions in China, like in the US, have become incrementally tighter even if both the Chinese and US stock markets failed to respond accordingly.
The US dollar remained under pressure in Asia following the disappointment that the FOMC did not signal a more aggressive stance, even though its delivered the nearly universally expected 25 bp rate hike. News that the populist-nationalist Freedom Party did worse than expected in the Dutch elections also helped underpin the euro, which rose to nearly $1.0750 from a low close to $1.06 yesterday. European activity has seen the dollar recover a little, but the tone still seems fragile, even though US interest rates have stabilized and the 10-year Treasury yield is back above the 2.50% level.
The US premium over Germany on two-year money peaked a week ago near 2.23. After the US yield fell in response to the Fed’s move, the spread finished near 2.12%, from which it has not moved far. Initial euro support has been found a little above $1.07. The first retracement target of the run-up is a little below there at $1.0690. The other retracement targets are seen near $1.0675 and $1.0655.
Few expected the Wilders in the Netherlands to have a say in the next Dutch government. He drew about 13% of the vote and will hold about 20 seats, which is five more than currently. Prime Minister Rutte’s party appears to have received the most votes and 33 seats, down from 41. The other coalition partners did worse. In particular, the disastrous showing of Labor means that Dijsselbloem, the current finance minister and head of the Eurogroup of finance ministers is unlikely to hold his post. Labor may have less than 10 seats in the new parliament, down from 38. The other coalition partner, Liberals, lost eight seats.