Speculators Least Bearish on Bonds Since 2008 Financial Crisis
Hedge-fund managers and other large speculators are the least bearish on Treasury 30-year bonds since the height of the financial crisis in May 2008 as a faltering economic recovery shows few signs of inflation.
Speculative short positions, or bets prices will fall, outnumbered long positions by 416 contracts in the week ending on Sept. 14, according to U.S. Commodity Futures Trading Commission data. Net-short positions fell by 8,592 contracts, or 95 percent, from a week earlier, and are down from this year’s high of 117,858 in April, the Washington-based commission said in its Commitments of Traders report on Sept. 17.
Tame inflation is also raising speculation that the Federal Reserve may start a new program of purchasing Treasuries to keep long-term borrowing cost in check. A survey of money managers overseeing $1.34 trillion by Ried Thunberg ICAP, a unit of the world’s largest inter-dealer broker, found respondents were almost evenly split in their expectations of whether the policy makers will announce this week more purchases.
“The long bond has been driven lower amid no inflation and a very weak economic picture and all of the uncertainty that comes with that,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a bond broker and dealer for institutional investors. “When you have in the background, the Fed buying Treasuries and the possibility of further quantitative easing down the road, it ensures that rates will stay at very low levels.”
The cost of living, minus food and energy prices, was unchanged in August, the Labor Department said Sept. 17. The overall consumer price index rose 0.3 percent, reflecting a rise in gasoline. Confidence among U.S. consumers dropped to a one- year low in September the Thomson Reuters/University of Michigan index showed Sept. 17.
A limited risk of inflation and a slowing economy help explain why economists project the Fed will hold interest rates in a range of zero to 0.25 percent when the Federal Open Market Committee meets tomorrow. The FOMC hold off from expanding the balance sheet by purchasing securities, according to 60 of 64 analysts surveyed Sept. 16-17.
Bond investors are not so sure. Treasuries rallied last week on speculation the Fed will announce more purchases of the securities this year to keep borrowing costs low and support the recovery. The survey by Jersey, City, New Jersey-based Ried Thunberg found that 57 percent don’t expect the Fed to announce additional asset purchases this week, while 43 percent expect policy makers to say they’re resuming quantitative easing.
The 30-year bond has outperformed other U.S. government securities this year, returning 15.7 percent, including reinvested interest, compared with 7.8 percent for the broader Treasury market, according to Bank of America Merrill Lynch indexes.
Yields on 30-year bonds fell 2 basis points, or 0.02 percentage point, to 3.91 percent on Sept. 17 in New York, according to BGCantor Market Data. The price of the 3.875 percent note maturing in August 2040 rose 11/32, or $3.44 per $1,000 face value, to 99 15/32.
Goldman Sachs Group Inc. and Pacific Investment Management Co. project the Fed will resume its so-called policy of quantitative easing by purchasing U.S. government debt as soon as this year to prevent what they see as a 25 percent chance the economy will slip back into a recession. Bank of America Corp. said the central bank will send the 10-year note yield to a record low of 1.75 percent in the first quarter of 2011.
Each week the CFTC publishes aggregate numbers for long and short positions for speculators such as hedge funds and institutional investors, as well as commercial companies that buy or sell futures to protect against price moves. Analysts and investors follow changes in speculators’ positions because such transactions can reflect an expectation of a change in prices.
The last time the data showed the market was net long was in the first half of 2008, just as the 30-year bond began a rally that pushed yields down from 4.72 percent at the end of May 2008 to a record low of 2.50 percent in December of that year as investors sought a refuge in U.S. government securities when credit markets froze and equities tumbled.
The pace of economic expansion is now showing signs of faltering even as the Fed keeps its target rate for overnight loans between banks at a record low and after buying more than $1.7 trillion in housing debt and Treasury securities last year.
The Fed purchased $22.9 billion of Treasuries since Aug. 17 as part of a program to reinvest principal payments on its mortgage holdings into long-term government debt to prevent money from being drained out of the financial system.
Policy makers are “prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,” Fed Chairman Ben S. Bernanke said Aug. 27 before central bankers at a conference in Jackson Hole, Wyoming.
“The only thing that will move the back end of the curve is an increase in the leading indicators of inflation, and we haven’t seen that yet,” said Christian Cooper, senior rates trader in New York at Jefferies & Co., one of the 18 primary dealers that trade with the Fed. “Until we get a shift in price perception we won’t have any fundamental change in the data one way or the other.”