Net short bets against 30-year Treasury bond hit record high -CFTC

BY Reuters | TREASURY | 10/09/20 06:38 PM EDT

By Kate Duguid and Saqib Iqbal Ahmed

NEW YORK, Oct 9 (Reuters) - Speculators' net bearish bets on 30-year Treasury bond futures grew to a record high in the latest week, data from the Commodity Futures Trading Commission showed on Friday, reflecting expectations of higher yields on longer-dated U.S. government bonds.

The amount of speculators' bearish, or short, positions in 30-year Treasury futures exceeded bullish, or long, positions by 230,312 contracts on Oct. 6, a record, according to the CFTC's latest Commitments of Traders data.

The 30-year yield, which moves inversely to prices, has rallied to a four-month high since August, when Federal Reserve Chair Jerome Powell announced that the central bank would allow periods of higher inflation in order to average its target 2% rate.

Longer-dated bonds are sensitive to inflation expectations as rising consumer prices can erode their value.

Bets on lower bond prices have also been fueled by expectations that the nascent U.S. economic recovery will continue, as investors await an additional round of fiscal stimulus from lawmakers and breakthroughs in the search for a vaccine against COVID-19.

U.S. President Donald Trump, reversing course from earlier this week, said Friday he would like a bigger coronavirus stimulus than either Democrats or Republicans are offering.

The sustained short interest in the 30-year bond also reflects the Fed's stimulus endeavors. The central bank has bought nearly $2 trillion worth of Treasury bonds since the start of the pandemic, the majority of which have been at the short end of the yield curve.

"The idea that huge amounts of stimulus and issuance are going to push up long rates would make sense if you were trying to speculatively position to be net short," said Jon Hill, U.S. rates strategist at BMO Capital Markets.

The Fed's purchasing helps keep yields low in spite of the surge in debt issuance to fund fiscal policy endeavors to combat the worst economic effects of the pandemic. Without the additional purchases at the long end of the yield curve, the increased issuance in 30-year bonds has driven prices lower, analysts said.

"In other tenors you are not seeing anything as dramatic, especially in the two-year. The Fed has so carefully locked rates near zero that it is hard to put on a very aggressive speculative position about where short rates are going to go," said Hill.

On Thursday, the U.S. auctioned off $23 billion of 30-year bonds to weak demand.

(Reporting by Saqib Iqbal Ahmed; Editing by Leslie Adler and David Gregorio)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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