Hedge Funds Close Out Short Bets on Japanese Bonds in a Hurry

(Bloomberg) -- Hedge funds may have helped fuel the biggest gain in Japanese bond futures in a year after money markets trimmed bets on the pace of U.S. interest-rate hikes.

Ten-year futures jumped as much as 58 ticks to 151.17 on Wednesday, the largest one-day increase since March 2021. Commodity trading advisors -- funds synonymous with trend-following quant strategies -- may have unwound bearish bets on the securities, according to data compiled by Bloomberg.

Overseas investors have sold 5.03 trillion yen ($43.7 billion) of the futures since the March delivery became the front-end contract in December, exchange data showed. Global funds accounted for 67% of transactions involving the derivatives last year, according to the figures.

Debt markets worldwide are reflecting bets for a gentler pace of tightening as traders anticipate the war in Ukraine will elicit a more measured response from central banks. In the case of Japan, bond bulls have the added benefit of a prolonged period of accommodative policy.

“Overseas speculators such as hedge funds and commodity trading advisors probably closed their short JGB positions,” said Akio Kato, general manager of strategic research and investment at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. “Rising uncertainty over the Ukraine situation doesn't offer much prospects for policy normalization in the U.S. and Europe.”

The rally in Japanese bond futures came after stop-loss buying of eurodollar futures and Treasuries spurred a surge in U.S. government securities on Tuesday.

Japan's 10-year bond yields dropped 3.5 basis points on Wednesday to 0.135%, the lowest since Jan. 26. Their U.S. counterparts had slipped 10 basis points the previous day.

The rolling 90-day inverse correlation between JGB futures and HFR Inc's Hedge Fund Research Macro/CTA Index has climbed to the highest since 2015. This suggests hedge funds had been holding bearish positions on the derivatives.