Treasury Futures Traders Ramp Up Bearish Bets on Two-Year Notes

Traders in the futures market are the most bearish on Treasury two-year notes in more than a year, after the Federal Reserve this month raised interest rates for the first time since 2006 and indicated it may do so as many as four times in 2016.

Hedge-fund managers and other large speculators increased futures bets to the highest level since October 2014 that two-year notes would fall. Speculative short positions, or bets on declines, outnumbered long positions by 118,261 contracts in the week ended Dec. 22, Commodity Futures Trading Commission data show. The yield on the two-year note traded at 1.07 percent Tuesday, the highest since April 2010.

The outlook is in line with the consensus of Treasury bond forecasters estimating the two-year note yield will climb to 1.15 percent at the end of the first quarter and 1.7 percent at the end of next year.

The bearish bets are "not surprising" in light of "a hiking Fed," said Dan Mulholland, head of Treasury trading in New York at Credit Agricole SA.

The U.S. sold $26 billion in two-year notes Monday at a yield of 1.056 percent, the highest at an auction of the security since 2009.

The CFTC data were published Monday due to the holidays. Each Friday 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.

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