(C) Reuters. FILE PHOTO: A picture illustration shows U.S. 100-dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao
By Saikat Chatterjee and Sujata Rao
LONDON (Reuters) – An unwinding of bets by some hedge funds against 10-year U.S. Treasuries, the world’s safest asset, explains the sudden ructions in bond markets, traders and fund managers told Reuters on Wednesday.
Yields on 10-year Treasuries fell below 1.40% in New York trading on Tuesday and rapidly fell to a near five-month low in early London trading of 1.33% before stabilising around 1.34%. They are now more than 40 bps below a January 2020 high of 1.77% hit in March.
That painted a gloomy picture in the popular “reflation” trade on stocks that do well in a rising rates environment, and the bets against U.S. Treasuries turned sour. The change was also attributed partly to fears of another deadly COVID-19 wave.
One trader at a European bank said the move was fuelled by the drop in U.S. Treasury yields below the 1.40% level as many funds had hedged some of their wider reflation bets by putting stop-loss orders at that level.
Stop-loss orders are essentially trades where investors hedge their broader market trades by taking an opposite position to trim losses in case markets move against them.
Another trader saw the move as technical, saying U.S. Treasury yields were a variation of the popular “death cross” in financial markets, where short-term moving averages (50-day) intersect with longer-term averages (100-day) pointing to lower yields.
The ‘long duration’ quality of tech and ‘growth’ stocks becomes attractive again with yields under pressure. Nasdaq futures were heading towards yet another record high on Wednesday.
“There was a spike around the 1.38-1.40 area and getting through that triggered some stops (stop losses),” said Charles Diebel, head of fixed income at Mediolanum International Funds.
“When it got to those levels, people who were short were feeling uncomfortable and started selling.”
Net bearish bets on 10-year Treasury futures jumped to 59,960 contracts for the week ended June 29, according to the Commodity Futures Trading Commission.
Daily turnover on the front-month 10-year U.S. Treasury futures was nearly 2 million contracts, the largest since May 26 but less than half of 2021’s peak of more than 4 million in late February, according to Refinitiv data.
The move rippled across the yield curve and caught broader markets by surprise, with the high-flying Australian dollar weakening sharply.
Though yields were under pressure for the last few weeks, the move lower accelerated after they began July at below 1.50%.
The seasonal summer lull in financial markets are also a reason for outsized moves, said one fund manager who declined to be named. He said the moves in U.S. debt were triggered by hedge funds, though the size of the trades were not “massive”.
Apart from positioning and technicals, the recent spread of the Delta COVID-19 variant and weak U.S. services activity data also weighed on investor sentiment, prompting them to seek safety in U.S. Treasuries.
“This is likely a shift in market narrative: away from inflation concerns to concerns about the sustainability of growth momentum, and you see that in pretty much every market,” said Vasileios Gkionakis, head of FX strategy at Banque Lombard Odier & Cie SA.
Graphic: The tech-yield connection: only getting stronger – https://fingfx.thomsonreuters.com/gfx/buzz/dgkvlrqwavb/Pasted%20image%201625660254714.png
Graphic: US yields – https://fingfx.thomsonreuters.com/gfx/mkt/jznvnyqeopl/US%20yields.JPG
Short exit stampede at 1.4% drives U.S. Treasury yield slump, traders say