Hedge Funds Face Bank Turmoil With Epic Short Treasury Bets

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(Bloomberg) — Hedge funds supercharged bearish Treasury bets to historic levels just days before the U.S. banking turmoil worsened and set off a stampede for the world's safest asset.

Leveraged funds extended overall shorts on bond futures to a new record in the week to May 2, according to a gauge of total net positions based on the latest data from the Futures Trading Commission. This is the seventh straight week of bearish bets – the longest streak since 2017.

The positioning looked ahead of a busy week for Treasuries that saw US regional banks rally on jitters and the Federal Reserve could halt its most aggressive tightening cycle since the 1980s. However, sentiment changed again on Friday as better-than-expected US jobs data pushed yields higher.

Goldman Sachs Group Inc strategists including Pravin Korapati wrote in a note, “We acknowledge there are some near-term risks — fears about smaller banks and an unresolved debt ceiling — that could further deepen pricing.” Is.” However, the Fed cut bets are “likely overdone viewed against a strong macro backdrop.”

base business

Nevertheless, the persistence of leveraged fund bearish bets suggests the possibility that at least some of the positions are the result of a revival of so-called basis trades. This occurs when buy cash Treasuries and short the underlying futures in an attempt to profit from any difference in pricing.

They could also be a sign that some traders believe yields have gone too low at a time when the Fed hasn't yet definitively stopped rate hikes.

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For investors like Amy Zee Patrick, developments in the banking sector mean that betting on Treasuries is now more nuanced.

“When rates went up after Silicon Valley Bank, I shorted my longs — I've never been short,” said Zee Patrick, who helps manage Pendal Dynamic Income Trust, which in the past Left 96% of his peers behind. “This is not the environment to be shorting an asset class that provides you with positive carry and protection against riskier events such as a more severe banking sector crisis.”

With the assistance of Yumi Teso.

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