Net Bearish Bets Against US Treasuries Rose To 1-Year Highs: Fed Rate Hike On Cards?

Net short bets against U.S. treasuries have reportedly risen to the highest level in last one year in the week ending last Tuesday.

What Happened: According to the latest report from the Commodity Futures Trading Commission, net-short leveraged fund positions in 10-year futures rose by almost 150,000 contracts in the week to last Tuesday, marking the biggest bearish shift since March 2022, reported Bloomberg.

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Fast-money funds appear to be temporarily entering into bets against longer-dated bonds after taking hits during the recent banking crisis volatility when they took positions expecting a sell-off in shorter maturities, the report said.

On Friday, treasury yields rose after U.S. labor data increased expectations that the Federal Reserve will hike rates in May by 25 basis points. The Labor Department reported the U.S. economy added 236,000 jobs in March, just shy of economist estimates of 240,000 new jobs.

Rate Path: Traders are currently betting the central bank will hike rates again in May as the U.S. economy is indicating resilience despite the crisis in the banking sector, the report said. The CME FedWatch Tool shows 66% probability of a 25 bps rate hike in the next policy.

The 10-year note yielded 3.37% during Monday morning Asian trade, up from Friday's low of 3.25%. The ProShares Ultra 20+ Year Treasury (NYSE:UBT) gained over 6.5% in last five days while the Vanguard Total Bond Market Index Fund ETF (NASDAQ:BND) rose over 1% during the period.

Expert Take: Goldman Sachs Group analysts, including Praveen Korapaty, wrote in a note that although U.S. yields bounced following the jobs report, they remain below levels from the prior week, leaving room for more upward repricing, according to the Bloomberg report.

"The mix of March data thus far should solidify the case for a hike at the upcoming May FOMC meeting," they wrote.

ANZ Research said in a note that the Fed's update to its inflation forecast in March looks underdone. "The Fed has consistently underestimated inflation in recent times. There is no reason to think it hasn't done so again, especially if financial conditions settle down quickly following the collapse of a few U.S. banks," it said.

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