Hedge Funds Need Rate Hikes After Nailing Fed’s Hawkish Pivot

(Bloomberg) -- The stars are aligned for hedge funds, which have been aggressively selling Treasuries in anticipation of hawkish turns by global central banks. Now they just need the Federal Reserve to deliver on its rate hike projections. 

Investors domiciled in the Cayman Islands -- a British Overseas Territory used as a base for hedge funds and other leveraged investors -- sold almost $54 billion of Treasuries in October, more than four times the largest net sales for any other region. That’s on top of $34 billion of sales the month before, as shown in U.S. Treasury data released Dec. 16.

The selling “likely reflects levered investors reducing exposure to Treasuries,” JPMorgan Chase & Co. strategists including Jay Barry wrote in a Dec. 16 note. They specifically pointed to the rise in two-year yields in October “as the Fed and other major DM central banks turned more hawkish.”

Hedge funds remain deeply short across the futures curve, and aggressively added to those positions last week, according to the latest data from Commodity Futures Trading Commission. Overall, leveraged funds are now the most short Treasuries since October 2020, as measured by U.S. 10-year equivalent contracts, CTFC figures show.

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