Hedge Funds Turned Bearish on Treasuries Right Before Rally

(Bloomberg) -- Speculators got their bond-market timing awry last week, ramping up bearish bets on Treasuries just as the emergence of the omicron variant sparked a global rally.

Leveraged funds increased net short bets on Treasuries by the most since April 2020, according to data from the Commodity Futures Trading Commission to November 30. But bonds continued to rise, with the Bloomberg U.S. Treasury Index hitting its highest since September on Friday, suggesting the recent rally may have been spiced up by a short squeeze.

“It's a mixture of positioning and illiquidity” Eugene Leow, rates strategist at DBS Bank Ltd. in Singapore, said about recent swings in the global bond markets. “It make sense to turn bearish on Treasuries based on fundamentals and what the Fed is communicating. Unfortunately, Omicron upended matters.”

Bond-market swings have spiked over the past two months as surging inflation spurred traders to bet on rapid policy tightening while the new coronavirus variant prompted concern about the growth outlook. Friday's confusing U.S. payrolls report ultimately set off a haven bid for Treasuries that sent the 10-year yield down to 1.33%, almost 40 points below its October peak, and flattened the curve.

Freshly Printed 2022 Market Playbooks Already Look Out of Date

Leveraged funds were still net long 10-year bonds, signaling some were likely holding bets on curve flattening that could have benefited as longer-term yields fell more than shorter-dated peers. The gap between 10- and 2-year notes shrank to 75 basis points on Friday, the narrowest in over a year.

Longer-end yields bounced back on Monday. The 10-year yield rose as much as five basis points to 1.39%, unwinding half of Friday's 10 basis point drop. Two-year yields rose three basis points, meaning the yield curve steepened moderately.

©2021 Bloomberg L.P.