Hedge Funds Turn Bullish on Treasuries as Yield Hovers Near 2%

  • Subdued inflation seen keeping interest rates low for longer
  • Probability of 2015 Fed rate liftoff has fallen to 32 percent

Investors have swung back to wagers that Treasuries will strengthen, as the yield on benchmark 10-year notes hovers near 2 percent.

Hedge funds and other large speculators held a net 17,692 bullish positions in U.S. government bonds in the week to Oct. 13, from 2,543 net bearish contracts in the previous period. Ten-year Treasuries rose slightly Monday, after a weekly gain that saw yields slide to 1.97 percent on Oct. 14, the lowest close since April 27. U.S. debt has rallied over the past month as bets receded that the Federal Reserve will this year make its first interest-rate increase since 2006.

“The prevailing sentiment is still skepticism in fixed income as to whether the Fed will raise interest rates this year,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “We think a hike this year would be an error,” and holding off is “bullish for Treasuries.”

The yield on the 10-year note fell less than one basis point, or 0.01 percentage point, to 2.03 percent as of 9:55 a.m. in New York, after dropping six basis points last week, according to Bloomberg Bond Trader data. The price of the 2 percent Treasury maturing in August 2025 rose 1/32, or 31 cents per 1,000 face amount, to 99 23/32.

China Impact

Treasuries were little changed even after data showed China’s economy slowed less than economists forecast in the three months through September -- possibly boosting the prospect of a Fed rate increase.

The 10-year break-even rate -- the gap between yields of fixed-rate and inflation-indexed Treasuries -- fell two basis points to 1.46 percentage points, down from as high as 1.94 in June. The U.S. consumer-price index sank to minus 0.2 percent in September, weighed down by plunging energy costs, government data showed last week.

“It’s mainly the Fed, and not really knowing when they’re going to start tightening” that’s keeping yields suppressed, said Janu Chan, an economist at St. George Bank Ltd. in Sydney. “Low inflation is allowing the Fed time to delay, and it also increases the chances that they’ll really go gradually.”

Futures traders see a 32 percent probability of Fed liftoff by the end of this year, about half the odds two months ago, according to data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

Fed Conundrum

That clashes with the view of the core of the Federal Open Market Committee. New York Fed President William C. Dudley said last week in Washington that the central bank should still raise interest rates this year so long as the economy stays on track. Chair Janet Yellen said on Sept. 24 that she expected liftoff to be warranted by year-end, in her most recent public comments on policy.

“The bond market continues its nasty divorce proceedings from Fed rate guidance,” Jim Vogel, an interest-rate strategist at FTN Financial Capital Markets in Memphis, Tennessee, wrote in an e-mailed note Friday. “Market views on inflation have shifted another leg lower. And they are biased to staying low.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE