Hedge Funds Boost Treasury 10-Year Shorts to Most Since November

  • U.S. plans to sell $56 billion of notes, bonds this week
  • Data will include retail sales, inflation, factory production

Hedge funds and other large speculators set the biggest bet against Treasuries in five months as Federal Reserve officials debate when to raise interest rates.

Net short positions in 10-year futures contracts increased to 117,305 last week, the most since the period ended Nov. 3, based on the latest data from the U.S. Commodity Futures Trading Commission.

The U.S. is scheduled to sell $56 billion of notes and bonds this week starting Tuesday, which will test investor demand ahead of the Fed’s next policy meeting April 26-27. Investors are betting the central bank will hold its benchmark interest rate unchanged at the session, while the odds of an increase by the end of this year are at about 49 percent, futures indicate.

“The picture is not too bad regarding the U.S. economy,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “The risk of deflation has eased” and there “is room for two Fed rate hikes this year” which will help drive yields higher, he said.

Benchmark 10-year Treasury note yields rose two basis points, or 0.02 percentage point, to 1.74 percent as of 7:22 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 fell 6/32, or $1.88 per $1,000 face amount, to 98 31/32.

Lenz sees the Fed increasing interest rates in June and December this year. He said he “expects quite a significant turnaround” in 10-year Treasury yields and forecasts them to climb to 2.20 percent in six months and then to 2.50 percent in 12 months.

Debt Auctions

The U.S. is scheduled to sell $24 billion of three-year notes Tuesday, $20 billion of 10-year debt the next day and $12 billion of 30-year bonds April 14.

The world’s-biggest economy is adding jobs, though inflation is stuck below the Fed’s 2 percent target. Data this week include retail sales and producer prices on Wednesday, consumer price the following day and industrial production on April 15.

“The bond market is not so attractive,” said Hiroki Shimazu, senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest lender. “The U.S. economy is in good shape. Compared with other industrial countries, it’s the best.” The Fed will raise rates two or three times before Dec. 31, he said.

Uncertainty over the outlook for the U.S. economy is higher than usual, which calls for a “cautious and gradual approach” to interest-rate increases, Fed Bank of New York President William C. Dudley said last week. Dudley echoed comments from Chair Janet Yellen, who said March 29 that the presence of downside risks means central bank officials should “proceed cautiously.”

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