ORLANDO, Fla., Nov. 16 (Reuters) – Hedge funds suspended their relentless sale of 10-year Treasury bill futures ahead of last week’s U.S. consumer price data, but the surge Annual inflation at its highest level in more than three decades suggests that the pause may be short.
The October Inflation Report released on November 10 was always going to be a big deal, potentially crucial for the Fed in terms of when it will start raising interest rates and by how much in the years to come. .
It did not disappoint. The headline annual inflation rate jumped to 6.2%, the highest since 1990, and fueled the already raging debate over whether the Fed is behind schedule.
Commodity Futures Trading Commission data for the week to November 9 shows the funds reduced their net short position in 10-year Treasury futures from 1,337 contracts to 267,332 contracts before the release.
This put an end to the huge accumulation of positions betting on a yield above 10 years. The unwinding of 296,052 contracts in October was the largest monthly switch to short positions since 2005, and the second since the contract was launched in the mid-1980s.
The previous week’s selling momentum was the strongest since March 2018, and on a rolling two-month basis, the unwinding of 448,539 contracts in October and so far in November marks the strongest sale on record.
‘TRANSITIONAL’ UNDER CONTROL
Barclays economists note that uncertainty about short-term inflation remains “unusually high” as supply adjustments play out. Inflation expectations have resumed their ascent to new highs after the latest figures as well.
âWhile we believe October CPI readings overstate underlying inflationary pressures, last month’s report illustrates lingering volatility and uncertainty,â they wrote in a note Monday.
Money markets did not advance the first of two rate hikes slated for next year starting in July, but opened up the possibility of a third 25 basis point hike towards the end of the year.
The further rise in break-even inflation rates – the difference between the yields on nominal securities and inflation-protected Treasuries – could be increasingly difficult for policymakers to ignore.
From one-year to 30-year maturities, all benchmark break-even rates hit their highest level in years – in some cases almost two decades – following October’s inflation data.
In recent days, a growing phalanx of former government and central bank officials, including Larry Summers, Bill Dudley and Willem Buiter, have urged the Fed to rethink its position that it can afford to stay a little longer because that inflation is “transient”.
As the funds eased the pressure on the 10-year portion of the curve, the latest CFTC data shows they increased their net short position in 5-year Treasury futures from 31,132 contracts to 407. 485 contracts. This is the biggest net shorts in a year.
On the other hand, they reduced their net short position in 2-year Treasury futures for a third week, from 46,371 contracts to 16,737. This is the smallest net short since the end of August.
This lack of cohesive movement on the curve highlights the uncertainty in the market, but funds appear to be enjoying the fruits of rising uncertainty and volatility.
Hedge fund industry data provider HFR’s benchmark HFRI Macro rose 1.46% in October, the first gain since May and the first rise in October in four years.
The views expressed here are those of the author, columnist for Reuters.
By Jamie McGeever; Editing by Simon Cameron-Moore
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