(Bloomberg) — Hedge funds have built up record long positions in short-term interest-rate futures pegged to the Secured Overnight Financing Rate. The positioning comes amid speculation that a slowdown in inflation and economic growth will drive the Federal Reserve to start easing monetary policy in the second half of 2023.
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Meanwhile in Treasuries, JPMorgan Chase & Co.’s latest client survey showed mounting doubts about where yields are heading: Both long and short positions dropped sharply, leaving neutrals gaining 12 percentage points in the week up to Jan. 3.
The following is a rundown of how positioning has unfolded in various markets:
Hedge Funds U-Turn
Hedge funds turned net long on SOFR futures for the first time since March in December and have extended the bullish bias across the front-end to strongest on record. It’s a sharp positioning reversal from the most net short on record at the start of September.
Overall, hedge funds continue to reduce their net short positioning on a 10-year futures equivalent basis across the curve, while asset managers extended net long duration for the fourth week in a row, according to CFTC data up to Dec. 27.
Selloff Protection Still Elevated
After breaking above parity for a brief period, skew on 10-year note futures continues to favor puts, indicating traders are paying a higher premium to hedge a deeper selloff in Treasuries. Flow highlights on Tuesday included a large 5-year put trade targeting 4.40% yield by the end of January.
Options Condor Risk
In 10-year Treasury options, open interest continues to be dominated by put strikes, reflecting a large condor trade targeting a yield range of 3.75% to 3.90%.
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Source: news.google.com
