Big Short on Treasuries Is Proving Both Popular and Profitable

(Bloomberg) -- One of the most crowded trades in financial markets is paying off.

Investors piled into short positions in U.S. Treasuries this month, making them the second most popular bet in financial markets, according to fund managers surveyed by Bank of America Merrill Lynch Global Research May 4-10. Those wagers paid off Tuesday, after the 10-year yield rose to its highest level since 2011, extending a selloff in the world’s biggest bond market.

“The short Treasury trade has become more extreme,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, in an interview. “As Treasury yields finally slice through 3 percent, more likely people will add to that than reduce it.”

The survey, which collected responses from 178 investors with combined assets of $525 billion, found that the most popular bet across markets for a fourth-straight month was a bullish stance on FAANG-BAT stocks, a group that includes U.S. tech giants Facebook, Amazon, Apple, Netflix, and Google parent Alphabet, as well as China’s Baidu, Alibaba and Tencent. Bearish bets on the U.S. dollar were the third most crowded trade.

The selloff in Treasuries on Tuesday pushed the 10-year yield as high as 3.076 percent and has come amid a rise in market expectations for inflation, which are hovering near the highest since 2014, after years of doubts about whether prices and wages would increase.

“The market these days is more fixated on U.S. inflation and higher inflation breakevens,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Capital USA Inc. in New York. “So this just gives more oomph to the short Treasury position.”

JP Morgan Chase & Co. Treasury clients last week reduced their neutral positions in U.S. debt and added to short bets, which had been at their lowest level since September. In currencies, hedge funds and money managers trimmed net bearish bets on the greenback last week after being caught wrong-footed by its rally since mid-April.

©2018 Bloomberg L.P.