Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 7, 2022. REUTERS/Brendan McDermid
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ORLANDO, Fla., Sept 12 (Reuters) – Hedge funds have slashed their record bet on rising US interest rates by a quarter, but it remains to be seen whether this marks a turning point in their dovish Fed outlook.
If movements in US interest rate futures markets over the past few days are any indication – the Fed’s final implied rate rose to nearly 4% – the broader trading community still believes the Fed will frontload rate hikes until they are confident that inflation is firmly heading towards the target.
The most recent report from the Commodity Futures Trading Commission for the week ended September 6 shows that speculators and leveraged accounts reduced their net short position in three-month SOFR futures by 255,583 contracts to 808,229 contracts.
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That was a record weekly move after a record net close to 1.06 million contracts the week before.
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Essentially, a short position is a bet that the price of an asset will fall, and a long position is a bet that it will rise. For bonds and interest rates, yields fall when prices rise and rise when prices fall.
If that was a profit-taking, it makes sense. The Funds had significantly increased their net short position in Secured Overnight Financing Rate Futures for 10 consecutive weeks while implied interest rates rose by around 85-100 basis points across the 2023 curve.
However, if the intent was to fuel the Fed’s eventual shift to a less aggressive monetary policy stance and possible rate cuts or cuts next year, this could be premature.
A string of Federal Reserve officials last week hammered out the message that tightening will continue and markets are now pricing in a nearly 90% chance of a third straight 75 basis point rate hike later this month.
“We must act boldly and strongly now as we have done thus far, and we must carry on until the job is done,” Powell said Thursday. Continue reading
Implied SOFR rates rose higher. The implied interest rate for the March 2023 contract, which traders believe will mark the peak for Fed funds, ended the week just below 4%, its highest level since June.
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The funds haven’t completely changed their minds, of course, increasing their net short position in short-dated Treasury futures.
The latest CFTC report shows that they increased their net short position in 2-year Treasuries from 281,600 contracts to 326,742 contracts. This is now the biggest bearish bet on two-year bonds since April of last year.
The funds have added to this short position for seven consecutive weeks, the longest streak in four years. If the funds hike this bet for another week, it will be the longest stretch of progressively bearish bets since 2013.
This continues to be a profitable trade – the two-year yield rose to a 15-year high of 3.5750% on Friday – and shorting bonds has been a winner for macro funds this year.
Hedge fund data provider HFR’s Macro Index rose 1.6% in August and is up 9.3% so far this year. HFR’s broader Composite Index is down 4% year-to-date.
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(The opinions expressed here are those of the author, a columnist for Reuters.)
Related columns:
“Peak Super Hikes,” Even If They’re Not Peak Rates (9 Sep)
Markets wary of both overextension and overshoot (September 7th) read more
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By Jamie McGeever; Editing by Lisa Shumaker
Our standards: The Thomson Reuters Trust Principles.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.
Jamie McGeever
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