LONDON (Reuters) – A probably large shift is underway within the U.S. bond market, underscored by a historic swing in hedge fund positions: traders are starting to suppose the U.S. economic system is near peaking and the Fed is close to the tip of its rate-raising cycle.
The Federal Reserve constructing is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie
Speculators on U.S. futures markets slashed their bearish bets on 10-year Treasuries final week by the most important quantity since April 2017, and the third largest for the reason that Commodity Futures Buying and selling Fee started compiling knowledge in 1995.
The transfer didn’t are available isolation. The worldwide economic system is stuttering, inventory markets are wobbling and a rising variety of Fed officers are signalling that the Fed could possibly be nearer to the tip of its cycle than beforehand thought.
Cash market pricing factors to a different fee hike subsequent month – the ninth of the Fed’s tightening cycle – however just one extra subsequent 12 months is totally discounted. As of September, Fed policymakers anticipated to wish to extend charges three extra instances subsequent 12 months.
Analysts at Morgan Stanley reckon that until additional tightening subsequent 12 months is accompanied by ahead steerage for fee hikes past these outlined within the Fed’s “dot plots”, then 10-year yields “have certainly peaked for this mountaineering cycle.”
“We … imagine U.S. charges have ended the cyclical bear market,” they wrote in a be aware final week.
Their counterparts at Citi are additionally bullish on Treasuries, citing safe-haven demand as traders shun crumbling credit score and inventory markets. “A brief squeeze in Treasuries is probably going and will gasoline additional positive aspects close to time period,” they wrote in a be aware final week.
The 10-year yield reached 3.25 p.c on Nov. 7, near the three.2610 p.c peak on October 9, a excessive not seen since April 2011. Nevertheless it has fallen nearly 20 foundation factors since, opening up the opportunity of a transfer again beneath 3.00 p.c.
CFTC knowledge for the week ending Tuesday Nov. 13 present that funds and speculative accounts slashed their web quick 10-year Treasury futures place by 205,991 contracts to 333,195 contracts. There have solely been two greater weekly positioning swings in favour of bonds since 1995.
As just lately as Sept. 30 funds and speculators have been sitting on a document web quick place of 756,316 contracts. This has been greater than halved in lower than two months.
International development fears have intensified in current weeks, and the ensuing injury to inventory markets has boosted the attract of safe-haven bonds. The S&P 500 fell practically 7 p.c in October, its worst month in additional than seven years.
It was a grim month for hedge funds, the worst in at the very least 5 years. With reporting in from over 2,000 funds, Barclayhedge’s broadest hedge fund index fell 3.16 p.c in October.
Creaking inventory markets have intensified debate across the Fed. The fed funds goal fee is at present in a 2 to 2.25 p.c vary, just under the decrease finish of the two.5 to three.5 p.c vary Fed officers reckon is the impartial degree of charges that neither stimulates nor brakes the economic system.
It’s a variety although, implying anyplace from two to 6 extra fee hikes.
Funds, speculators and cash market merchants are betting on the decrease finish, and little surprise. Financial institution of America Merrill Lynch’s fund supervisor survey in November confirmed probably the most bearish outlook for world development since November 2008, and the gloomiest outlook for company earnings since June 2012.
“We’re at a degree now the place we actually should be particularly knowledge dependent,” Fed Vice Chair Richard Clarida mentioned on Friday. “I believe definitely the place the economic system is right this moment, and the Fed’s projection of the place it’s going, that being at impartial would make sense.”
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By Jamie McGeever, enhancing by Larry King