Hedge funds have recently been on the losing side of the Treasury market, as they increased their short positions on Treasuries to a record high. This was right before smaller-than-expected U.S. bond sales and disappointing job data caused a bond market rally.
The rally in the bond market was triggered by a combination of factors, including the Federal Reserve’s decision to keep interest rates steady and a surprising slump in employment growth last month. This fueled speculation of potential rate cuts in the future.
One ETF that benefited from this trend was the iShares 20+ Year Treasury Note ETF (NASDAQ:TLT), which saw a substantial gain of 3.9% over the past week. This was its strongest performance since the beginning of the year when it had a surge of 5.6%.
Leveraged funds increased their net short positions in Treasury futures to levels not seen in the data dating back to 2006. Meanwhile, cash bonds experienced a rally in the previous week, according to Bloomberg data.
Gareth Berry, a strategist at Macquarie Group Ltd., stated that leveraged funds had taken their short positions on U.S. Treasuries to an extreme level, potentially signaling a market incident.
Renowned hedge fund investor Bill Ackman made a significant decision in this situation. He recently announced that he was covering his Treasury short positions, which had delivered positive returns since August. The decision was made due to concerns over weakening economic data and global risks.
Since Ackman’s announcement, 10-year Treasury yields have fallen from 5% to the current 4.6%, and the U.S. Treasury 10 Year Note ETF (NYSE:UTEN) has rallied by 3%.
Looking ahead to the future, market-implied probabilities suggest a greater likelihood of a rate cut, perhaps as soon as May 2024. Speculators are also pricing in nearly a full percentage point of rate cuts for the next year, according to CME Group Inc.’s Fedwatch tool.
Investors will be paying close attention to speeches by Federal Reserve officials this week, particularly from Fed Chair Jerome Powell. These speeches could provide further insight into the direction of the economy and potential future rate cuts.