Fed Tightening Cycle Near Peak? This Treasury Futures Trend Seems To Say It Could Happen

Net-short leveraged positions in 10-year Treasury futures by hedge funds have reportedly grown to the largest levels since 2019 while net-long positions taken by institutional investors have risen to record levels. This level of contrarian positions by these classes was last seen in late 2018 when the Federal Reserve’s rate tightening cycle was about to reach its peak, reported Bloomberg.

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Treasuries have recorded gains this year on expectations that the central bank will soon bring an end to its toughest rate hike cycle seen in a generation. As a result, fast-money funds may have been encouraged to take short positions on 10-year notes on expectations the sharply-inverted yield curve will soon begin to steepen, the report said.

Meanwhile, buy-and-hold investors like asset managers are getting attracted by the highest interest payments on benchmark notes in over a decade.

The Vanguard Extended Duration ETF EDV has gained over 6% since the beginning of 2023. The SPDR Portfolio Long Term Treasury ETF SPTL has gained over 4% in the period.

Andrew Ticehurst, a rates strategist in Sydney at Nomura Inc said a bullish theme has been building in rates markets, with a growing consensus that the Fed is close to done with rate hikes. “A bullish theme has been building in rates markets, with a growing consensus that the Fed is close to done with rate hikes,” he said according to the report.

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