Column-Leveraged funds record short Treasuries bet may be vulnerable: McGeever

investing.com:

By Jamie McGeever

ORLANDO, Florida (Reuters) — Hedge funds ended October holding a record net short position in U.S. Treasuries futures, signaling their persistence with the so-called 'basis trade', although the steep plunge in yields since then may force a substantial reversal in the coming weeks.

The latest Commodity Futures Trading Commission (CFTC) figures show that speculators, especially leveraged funds, ramped up their short Treasuries positions in the week ending Oct. 31, most notably at the short end of the curve.

This fits with the 'basis trade', a leveraged arbitrage play profiting from price differences between cash bonds and futures that speculators have been doing for much of this year.

Regulators have expressed concern about the financial stability risks a sharp and disorderly unwind of these bets could pose in an adverse bond market scenario.

Leveraged funds — those speculators more active in the basis trade — increased their combined net short position in two-, five- and 10-year Treasuries futures by more than 300,000 contracts to nearly 5 million contracts, CFTC data show.

That is significantly larger than the peak combined net short position from 2019 of just over 4 million contracts, boosted by fresh record short positions in the two- and five-year space.

In October leveraged funds increased their net short position in two-year futures by 242,000 contracts to 1.6 million contracts, and by 193,000 contracts in five-year futures to 1.93 million. Both these totals are fresh records.

They only grew their net short position in 10-year futures by 10,000 contracts, however. 'Non-commercial' accounts, often seen as a broader grouping of CFTC hedge funds and speculators, actually cut their 10-year net shorts