(Bloomberg) - It might not feel like it in these bearish times on Wall Street, but traders are turning somewhat bullish on Treasuries as they hedge for lower yields, build up longs and pare bets on aggressive Federal Reserve rate hikes.
The latest JPMorgan Chase & Co. Treasury survey shows clients are now taking the biggest net long position in over two years. In futures, asset managers continue to extend bullish wagers across the curve, even as hedge funds remain ever-bearish. And recent options flow shows a growing conviction that the Fed will increase interest rates by a more modest 50 or even 25 basis points in December, a shift from its recent flurry of supersized hikes.
The following is a rundown of how positioning unfolded in various markets through Monday.
Asset Managers Boost Duration
Asset managers’ net exposure extended for the fourth week in a row across the eurodollar and Treasuries curve, effectively increasing by 157,619 positions in 10-year note futures. Meanwhile hedge funds added to their net short by 57,692 positions in the week to Oct. 18.
Asset managers were most bullish in 10-year note futures, where around $5 million per basis-point of risk was added on a net basis to long positions. On the flip side, hedge funds were most bearish 2-year note futures, where the net short was extended by $3 million per basis point risk as 2-year yields peaked at 2.56%.
Front-End Positions Build
Positions continue to be added to across most futures tenors, notably in the 2- and 5-year, where open interest rose by a combined 57,208 last week, equivalent to around $2.3 million per basis point. At 2,088,894 as of Friday close, open interest in 2-year note futures is the most in the current contract cycle.
Block Trades
Block trade activity surged across 10-year note futures over the week where the number of trades reached 20 for a combined 58,400 contracts.
Bearish Skew Remains
Traders are continuing to pay a higher premium to hedge a rise in 10-year yields versus a fall as US 10-year yields reached a peak at 4.335% last week. But recent bearish options activity included a high priced bet on 10-year yields extending a cheapening move from near current levels via March 2023 options.
In December 10-year Treasury options, there remains a high portion of put-open interest at the 110.00 strike, equivalent to approximately 4.20% 10-year yield. Over the past week, call risk also built up in the 113.00 and 115.00 strikes, equivalent to around a 3.75% and 3.45% yield.
By Edward Bolingbroke
