Tuesday, April 25, 2023

Much has been made of the volatility in the bond markets this year and rightfully so. Over the past few months it became relatively common to see Treasury yields move higher or lower by 0.20% a day—something that hasn’t happened in decades and a large departure from the 0.05% moves that are considered normal. However, while volatile, Treasury yields have largely been in a range over the past few months with the 10-year Treasury yield ending last week nearly on top of its 200-day moving average.

That trading range hasn’t stopped some investors from making outsized bets, though. As discussed in a recent Bloomberg article, leveraged funds, aka hedge funds, have recently put on the largest short position ever in Treasury futures in a bet that rates will rise from current levels. Asset managers and other institutional investors, however, still hold near the most 10-year futures contracts ever. Moreover, recent data shows that international investors, particularly Japanese investors, have started to reengage in the U.S. Treasury market as well, with the expectation that yields are past peak levels. To be fair, these positions could be part of a broader trade or outright hedges and not necessarily a bet on the direction of interest rates. But nonetheless, positioning seems to be at odds.

Any Futures referenced are being presented as a proxy, not as a recommendation

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