The Next Big Short: Hedge Funds Place Record Bearish Bets On US 10-Year Treasuries

Hedge funds went "all-in" against U.S. Treasuries as they placed their largest-ever short bet on the 10-year Note benchmark.

Latest positioning statistics from the Commodity Futures Trading Commission (CFTC) on commitments of traders revealed that hedge funds' net positions on 10-year Treasury notes have never been more bearish.

The number of net derivative contracts on the "UST 10Y NOTE" dropped to a record low of negative 1.29 million in the week ending April 18, with hedge fund traders increasing their short bets by 149,350 contracts for the week. 

According to Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney, "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 added.

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A Contrarian View By Hedge Funds

So far in 2023, ETFs investing in U.S. Treasuries have had significant inflows, with the iShares 7-10 Year Treasury Bond ETF IEF absorbing $4.4 billion of net inflows and the iShares 20+ Year Treasury Bond ETF TLT getting $6.5 billion.

Institutional investors and asset allocators have the lowest stock versus bond allocation since 2009, and have placed the largest overweight in bonds also since March 2009, according to the latest Bank of America Global Fund Manager Survey. A net 84% of fund managers polled by BofA believe global inflation will head lower from here and a gross 72% share of investors see short-term rates lower within the next 12 months, the Survey also showed.

The bond market is substantially pricing in a recession, as evidenced by the severe level of inversion in the Treasury yield curve. 

The current difference between the 10-year Treasury yield and the 3-month yield is -1.65%, the lowest level documented by Federal Reserve Bank of St. Louis records dating back to 1982, and is used to predict 1-year forward recession odds, which were about 58% of a recession occurring before March 2024.

Overall, hedge funds appear to be betting against the market consensus that inflation will continue to decrease from here, and rates will fall as the Fed begins its easing cycle.

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