No Recession Ahead? Hedge Funds Reportedly Place Record Bets Against Benchmark Treasuries

Hedge funds appear to be holding the view that the U.S. economy will not tip into recession in coming times as is reflected by their record bets against the 10-year benchmark U.S. Treasury notes.

What Happened: Leveraged investors increased their net shorts on 10-year Treasury futures to a record 1.29 million contracts as of April 18, reported Bloomberg, citing data from the Commodity Futures Trading Commission.

This was the fifth straight week that net shorts increased, the report added.

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Treasuries act as safe haven during times of recession or when a recession is expected. That is the time when investors flock into the instruments, displaying a risk-off sentiment. Increasing short bets on benchmark treasuries counter the risk-off sentiment mood and reflect optimism about the economy.

Policy Path: Hedge funds will be vindicated if the central bank prevails in its view that rates need to keep moving higher, the report stated. Interestingly, two central bank officials, including Philadelphia Fed President Patrick Harker and Cleveland Fed President Loretta Mester, on Thursday reiterated the need for more interest rate hikes.

Yield on the 10-year U.S. Treasury note has witnessed significant volatility in recent times. After hitting levels of about 4.08% in early March, the yield fell to as low as 3.26% in early April. The iShares 7-10 Year Treasury Bond ETF IEF has gained over 2% since the beginning of the year.

Damien McColough, head of fixed-income research at Westpac Banking Corp. told Bloomberg that hedge funds may be thinking that inflation will be stickier than many in the market are currently expecting. "On the face of it, this big short doesn't reflect the view that there will be a near-term recession," he said.

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