US Treasury futures positions at extremes: McGeever
Repeats July 15 item to additional readers, no change to text of story
By Jamie McGeever
ORLANDO, Florida, July 15 (Reuters) -Investor positioning in U.S. Treasury futures is stretching to extreme - and in some cases, record - levels that are likely to revive concerns about potential liquidity and stability risks in the world's largest and most systemically important bond market.
The growth in asset managers' "long" and leveraged funds' "short" positions comes as slowing inflation and cooling economic activity suggest the Fed will begin its interest rate-cutting cycle sooner rather than later.
It's unclear whether these moves are being driven by the so-called "basis trade", where leveraged hedge funds arbitrage small price differences between cash Treasuries and futures, a trade funded via the overnight repo market.
Essentially, funds sell Treasury futures and asset managers are the buyers. Financial authorities and regulators have warned of the financial stability risks if these funds, some levered up to 70x, are forced to quickly cover their positions.
What is becoming increasingly clear, however, is the U.S. bond market is at an inflection point in terms of Fed policy, while the longer-term fiscal outlook remains highly challenging, to say the least.
The potential for a price shock or policy misstep cannot be ignored. What if, for example, a sharp deterioration in economic or labor market data prompts the Fed to cut rates cut by 50 basis points in September instead of the anticipated 25 bps?
This is the backdrop to the latest Commodity Futures Trading Commission figures that show asset managers' and leveraged funds' positions are at or close to record levels, especially at the front end of the yield curve.
CFTC data show that asset managers' aggregate long position across two-, five- and ten-year futures was worth a record $1.083 trillion in the week to July 9. That has expanded nearly 30% since March.
Leveraged funds' aggregate short position across the curve now stands at $1.00 trillion, up around 25% from March and nudging last November's record high of $1.01 trillion.
Within that, asset manager longs and leveraged fund shorts in the five-year space are at all-time highs of $373 billion and $321 billion, respectively, while asset managers' long position in two-year futures was a record $477 billion in the week to July 2.
A long position is effectively a wager that an asset will rise in value, and a short position is a bet that its price will fall.
FUNCTIONING SMOOTHLY
Adjusted for duration, smoothing out the overall market's sensitivity to movement in Treasury yields, positions across the curve are at record levels, according to Matt King, founder of financial market research and consultancy firm Satori Insights.
As long as these offsetting positions can be matched off when one side decides to cut them, the market will continue to function smoothly. Historically, market-making broker-dealers would plug any gap, but that role is now being filled by clearing houses.
The bigger the positions, the bigger the potential hole is created by a rapid reversal. Regulators do not want a repeat of March 2020 when a disorderly unwind of hedge funds' short positions triggered severe volatility and illiquidity in the Treasury market.
Matt King at Satori Insights says that doesn't appear to be on the immediate horizon. He notes that a healthy, liquid market should indeed have a diverse investor base spanning hedge funds and 'real money', long-term and short-term, and value-oriented and momentum-oriented players.
But the size of the positions being accumulated bear monitoring.
"You can think of this as potentially putting pressure on the pipes, but if everything's being centrally cleared and properly margined - as opposed to needing to go through dealer balance sheets - you may well be able to cope with those volumes," King says.
"The worry comes if you really delve into the weeds of the settlement process and conclude the pipes can't take the strain. But I'm not quite ready to draw that conclusion as things stand," he adds.
(The opinions expressed here are those of the author, a columnist for Reuters.)
US Treasury 'basis trade' positions back at record levels https://tmsnrt.rs/4cFYBI6
Leveraged funds & U.S. Treasury futures short positions https://tmsnrt.rs/3xX5ZQd
Asset managers & U.S. Treasury futures long positions https://tmsnrt.rs/4bP4v8u
(By Jamie McGeever)
</body></html>Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
