Speculators with a record net short position in Treasury bond contracts

Tuesday brings another handful of important data for the market. Is the American economy getting more and more out of breath? What's happening in the US Treasury bond market? In the following report, we will cover the following topics:

• Hedge funds hold the largest ever net short position in XNUMX-year Treasury bond futures.
• The US yield curve is inverted and funds are betting on further reversal.
• Funds increase their net short positions in XNUMX-year bonds and decrease their net short positions in XNUMX-year bonds.
• The New York Fed's recession probability model indicates a high probability of recession, which is consistent with an inverted yield curve.

Biggest short position ever

During the last American meeting FED speculators held the largest-ever net short position in two-year Treasury bond futures, Reuters reported. Their strategy is likely focused on a further inversion of the US yield curve.

The question of whether the Federal Reserve will raise interest rates after the end of this month's hold is still open. However, the observed fund yield curve strategy seems to be effective. Short-term rates are rising above the ten-year cost of borrowing, and the spread is approaching historical lows (10-year bond yield minus 2-year bond yield.

CFTC data and COT report

The latest figures from the CFTC show funds increased their record net short positions in two-year Treasury bond futures in the week to June 13. The number exceeded one million contracts, while the funds reduced their net short positions in 10-year bond contracts for the second time in a row.

It is worth noting that a short position is practically a bet on the decline in the price of the asset, while a long position is a bet on the increase. In the case of bonds, the yield increases as prices fall and decreases as prices rise.

Funds take positions in bond futures also for hedging purposes, therefore data CFTC they do not always reflect explicit directional speculative bets.

The scale of the latest move is remarkable – the net short position in two-year Treasury futures contracts has doubled in just two months to over one million contracts. At the same time, funds are reducing their pessimistic bets on XNUMX-year bonds, reaching the biggest drop in more than a year.

How big positions are opened on fut. on US bonds?

Currently, the funds' net short position in 354-year bonds exceeds their net short position in 000-year bonds by approximately XNUMX contracts, which is the largest spread in two years and one of the largest in history.

If they are indeed hedge funds that bet on an inversion of the yield curve between two-year and ten-year bonds, they are in a favorable position. The yield curve, which has been inverted for almost a year, is now up around 95 basis points and has doubled in the last month to close to the 110 basis point level recorded before the US banking shock in March, Reuters concludes.

This is the deepest reversal since 1981

Even though American banking sector seems to be beyond the crisis, the yield curve is giving alarming signals, suggesting the possibility of a recession. While risky assets appear to be pricing in recession risk at a lower level, the yield curve tells a different story. This is why speculators keep their bets on the yield curve reversal, taking advantage of the potential advantage.

Given these developments in the bond market, investors are likely eagerly awaiting further decisions from the Federal Reserve and their impact on the future of the yield curve. It is also worth remembering that the more speculators trade in one direction, the greater the risk short squeeze.

US 2Y Bond CFD Chart.