ORLANDO, Fla. Nov 16, Reuters -- hedge funds stopped selling 10 year Treasuries futures ahead of the U.S. consumer price data last week, but the spike in annual inflation to its highest in more than three decades suggests that the hiatus could be a short one.
The October inflation report released on November 10 was going to be a biggie, and it could be a biggie for the Fed in terms of when it starts raising interest rates and how much over the next few years.
The headline inflation rate jumped to 6.2%, the highest since 1990, and poured fuel on the already raging debate over whether the Fed is behind the curve.
Commodity Futures Trading Commission data shows that funds have trimmed their net short position in 10 year Treasuries futures by 1,337 contracts to 267,332 contracts ahead of the release.
This stopped the huge build up of positions betting on a higher 10 year yield. October's unwind of 296,052 contracts was the biggest monthly swing to short positions since 2005 and the second-largest since the contract's launch in the mid- 1980 s.
The week before was its strongest since March 2018, and the unwind of 448,539 contracts over October and so far in November marks the most intense selloff ever, on a two-month rolling basis.
As supply adjustments play out, uncertainty about near-term inflation remains unusually elevated, according to economists at Barclays. The report last month showed the ongoing volatility and uncertainty, and we think that October's CPI readings overstate underlying inflationary pressures.
Money markets did not bring forward the first of two rate hikes penciled in for next year from July, but opened up the possibility of a third 25 basis point increase toward the end of the year.
The move up in breakeven inflation rates - the difference between yields on nominal and Treasury Inflation-Protected securities - may be more difficult for policymakers to ignore.
From one-year out to 30 year maturities, all benchmark breakeven rates rose to their highest in almost two decades - in some cases in almost two decades after the October inflation data.
In recent days a growing number of leading government and central bank officials, including Larry Summers, Bill Dudley and Willem Buiter, have urged the Fed to reconsider its position that it can afford to sit it out a bit longer because inflation is 'transitory'.
The latest CFTC data shows that the firm increased its net short position in 5 year Treasury futures by 31,132 contracts to 407,485 contracts, despite the fact that funds eased the pressure on the 10 year part of the curve. They cut their net short 2 year Treasury futures position by 46,371 contracts to 16,737 for a third week. The uncertainty hanging over the market, but the funds seem to be enjoying the fruits of rising uncertainty and volatility, despite the lack of a cohesive move across the curve.
Hedge fund industry data provider HFR's benchmark HFRI Macro Index increased by 1.46% in October, the first gain since May and the first increase in October in four years.