Market Extra: Asset managers and hedge funds are increasingly taking different positions in the U.S. Treasury market

by | Aug 30, 2023 | Stock Market

Asset managers and hedge funds are increasingly taking different positions inside the most liquid government-securities market in the world — and the gulf has only gotten wider this month. Hedge funds, or leveraged players, have been extending short positions in the Treasury market, according to BofA Securities rates strategists Meghan Swiber and Anna Zhang. However, asset managers are going long, alongside continued inflows into U.S. fixed-income funds, the strategists said in a note this week.

The different views of the fast-money and real-money crowds helps to explain why the 10-year Treasury yield
has zigzagged in August, going from its highest closing level since November 2007 down to an almost three-week low on Tuesday. Asset managers, or real-money players, are buying Treasurys to take advantage of U.S. yields now hovering between 4.1%-5.5%. Hedge funds, known as the fast-money community, have ramped up their bearish views of government debt in what amounts to a vote of confidence in the U.S. economic outlook, causing technical adjustments to be made along the way that are impacting the 10-year yield, investors said.“Hedge funds will continue to push record shorts in Treasury futures on the view the economy is unlikely to slide into a recession,” said Ben Emons, a senior portfolio manager and head of fixed income at NewEdge Wealth in New York. Meanwhile, the retail public is flocking to Treasurys “on a view that rates are likely to stay higher.”Hedge funds are going short largely through basis trades, which use leverage to arbitrage the price differences between Treasury futures and cash Treasurys. As the U.S. economy shifts into lower gear, those short positions “will be challenged” and may need to be closed out, which could inject further volati …

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