Hedge Funds Place Biggest Short Ever for Benchmark Treasuries

(Bloomberg) — The Federal Reserve is sure that the US economy can avoid a recession despite the burden of higher interest rates. Hedge funds seem to agree.

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Leveraged investors boosted their net shorts on 10-year Treasury futures to a record 1.29 million contracts as of April 18, data from the Commodity Futures Trading Commission show. The bets extended the bearish positions to a fifth straight week.

“Hedge funds may be thinking that inflation will be stickier than many in the market are currently expecting,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “On the face of it, this big short doesn’t reflect the view that there will be a near-term recession.”

Treasury yields have been whipsawed in recent weeks as traders engage in a tug-of-war with the Fed amid a growing debate about when policymakers will start cutting rates. Hedge funds will be vindicated if the US central bank prevails in its view that borrowing costs need to keep marching higher.

The 10-year Treasury yield has advanced nine basis points this month to 3.56%, unwinding some of March’s 45-basis-point drop. The benchmark yield remains in a deep discount to two-year rates, suggesting that a downturn is on the cards.