BLBG: Bears Who Called Treasuries Wrong Retreated Before Selloff
(Bloomberg) -- Most of the Treasury market bears who proved to be experts at bad timing in January are calling the market wrong again in February.
Hedge-fund managers and other large speculators cut bets against 10-year notes by more than 80 percent in 2015 -- just in time to miss what is set to be Treasuries’ biggest monthly decline in more than five years. That comes after bonds rallied in January in the face of the largest bets in four years they’d go the other way.
“We’ve probably seen the low point for yields,” Steven Major, HSBC Holdings Plc’s London-based head of global fixed-income research, said in an interview on Bloomberg Television’s “Countdown” with Manus Cranny, Mark Barton and Anna Edwards. “Those market moves are people actually starting to balance things a little bit. It could easily be the case we could go to 2.5 percent or even higher later in the year.”
Benchmark 10-year yields rose to 2.16 percent at 7:04 a.m. New York time, the highest since Jan. 2, and up from this year’s low of 1.64 percent. The price of the 2 percent securities maturing in February 2025 fell 5/32, or $1.56 per $1,000 face amount, to 98 20/32.
Traders were caught by surprise on Jan. 9 when the Labor Department reported U.S. wages declined in December, fueling concern inflation was slowing. The following report a month later showed wages roaring back, and Treasury yields surged in tandem. With bets on higher interest rates rising, the Federal Reserve will release minutes from its latest meeting later on Wednesday.
Short Positions
“There were definitely people that were caught off guard,” said John Gorman, head of dollar interest-rate trading for Asia-Pacific at Nomura Holdings Inc. in Tokyo. “People thought the market would sell off. We saw exactly the opposite. Now there’s been a strong payroll number. We could be in a different yield range” in February, he said.
Net short positions -- bets against 10-year Treasuries -- shrank by 73,964 contracts to 44,816 in the week through Feb. 10. It was the biggest drop since May and took them to the fewest since October, according to data from the U.S. Commodity Futures Trading Commission.
Investors would have been better off adding to their shorts. Treasuries have fallen 2.6 percent this month through Feb 17, heading for the steepest monthly loss since December 2009, according to Bank of America Merrill Lynch indexes.
Shorts increased to as much as 261,282 on Dec. 30, the most since 2010. The market went on to punish the bears with a 2.9 percent rally in January, based on the Bank of America figures.
‘Counter-trend Indicator’
The futures positions are a possible indication to bet the opposite way, said Jim Caron, a portfolio manager at New York-based Morgan Stanley Investment Management, which has $403 billion in assets.
“If everybody’s long it means the market’s vulnerable to a selloff, and vice versa,” Caron said. “People usually look at them as a counter-trend indicator.”
Bears will win the day if economists’ forecasts for this year are accurate. The 10-year benchmark yield will climb to 2.64 percent by Dec. 31, based on a Bloomberg survey with the most recent forecasts given the heaviest weightings.
An investor who buys today would lose about 2.4 percent, according to data compiled by Bloomberg.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net
