Bond Market’s Pre-Fed Wipeout Led by Asset Manager Selling Spree

  • Group’s net long in 10-year futures falls to 2017 low
  • Maturity’s yield jumped most since June on revived Fed wagers

How Yields May Defy Wall Street Logic Once Unwind Begins

Money managers in the Treasury market practically sprinted for the exits last week, spooked by yields at year-to-date lows with the Federal Reserve’s decision on its $4.5 trillion balance sheet looming.

That’s the takeaway from the latest Commodity Futures Trading Commission data. Asset managers slashed their long position in 10-year futures by 114,832 contracts in the week through Sept. 12, the biggest reduction since January. That left them net long by about 45,000 contracts, the least bullish stance on the maturity this year.

The selling coincided with the 10-year yield’s rebound from the 2017 low of 2.01 percent it touched Sept. 8. It surged last week by the most since June, rising 15 basis points to 2.2 percent. 

The main driver: revived bets on a faster pace of Fed hikes, just as officials are set to announce their latest policy decision on Sept. 20. The Fed is expected to keep rates on hold this week, while unveiling the timing of when it will start unwinding its balance sheet. The central bank will also release its latest view on the economy, and if policy makers have a rosier view than traders expect, asset managers could slash their positions even further.

“Rates were a bit stretched around 2 percent, so asset managers reducing longs would make sense,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities in New York.

The market-implied odds that the Fed will hike rates again by year-end have risen to 44 percent, from below 25 percent a week ago. With the chances climbing, two-year U.S. yields soared 12 basis points, the most since March, when Fed speakers jolted market probabilities higher in advance of their decision to tighten that month.

Asset managers who stuck to bullish bets heading into the Fed’s meeting may still get the last laugh. Treasuries rallied after policy decisions in March, June and July, with 10-year yields declining by an average of eight basis points, BMO Capital Markets strategists wrote in a Sept. 15 note. After the other two meetings, in February and May, yields rose about two and four basis points, respectively.

What to Watch

  • The FOMC decision will dominate a week that’s otherwise light on big data releases
    • Sept. 18: NAHB housing market index
    • Sept. 19: Housing starts, building permits, import and export price indexes
    • Sept. 20: MBA mortgage applications and existing home sales
    • Sept. 21: Initial jobless claims, Philadelphia Fed business outlook, leading index and Bloomberg consumer comfort
    • Sept. 22: Markit U.S. manufacturing, services and composite PMIs
  • On Sept. 21, Treasury will auction $11 billion of 10-year TIPS
    • The 10-year breakeven rate touched 1.87 percentage points last week, the highest since May, as consumer price data beat estimates
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