Bond Rally Squeezes Hedge Funds That Were Most Short Since 2007

  • Funds held bearish positions in U.S. two-year note futures
  • Treasuries surged after May jobs data clouded Fed rate outlook

Bond bears were licking their wounds after a weaker-than-forecast May jobs report sent Treasuries surging. Data released later Friday suggest the pain was widespread.

Hedge funds and other speculative investors were net short Treasury two-year note futures in the week ended May 31 by the most since before the financial crisis, according to U.S. Commodity Futures Trading Commission data. Two-year notes surged Friday by the most since September after the Labor Department reported the U.S. created only 38,000 jobs in May, the lowest monthly increase in almost six years.

The funds’ net short position built up in recent weeks as Federal Reserve officials’ comments seemed to indicate another interest-rate increase was imminent after liftoff from near zero in December. Two-year notes are the coupon securities most sensitive to Fed policy expectations. Friday’s jobs data pushed futures traders to boost wagers that the Fed would delay hiking, wrongfooting funds that bet yields would rise.

“Since the Fed started implying they were going to hike, you started seeing movement from long to short positions,” said Jonathan Rick, an interest-rate derivatives strategist in New York at Credit Agricole CIB. “They probably got hit pretty hard.” 

Funds were net short by 192,797 contracts in the week ended May 31, according to CFTC data.

Fed Chair Janet Yellen at an appearance May 27 said officials would raise rates "probably in the coming months." After the jobs data, Fed Governor Lael Brainard on Friday said she sees “benefit to waiting” for more information, given mixed second-quarter economic data.

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