(Bloomberg) -- A top-performing quant fund is shorting five- to 10-year US Treasuries on expectations that interest rates will stay on hold this year as prices remain elevated. 

The Catalyst/Millburn Hedge Strategy Fund is selling Treasury futures while buying short-dated bills. The positions reflect a view that markets may be overestimating the chances of a rate cut by the Federal Reserve, while potentially overlooking the pressure on longer-dated yields from a ballooning US deficit. 

“It’s more likely than not that the Fed won’t be able to go ahead with these rate cuts that they talked about,” said David Miller, New York-based chief investment officer at Catalyst Funds. “It’s not clear how you can get rates down without getting inflation back up.”

The fund with more than $7 billion in assets has returned nearly 14% this year, beating 94% of peers, according to data compiled by Bloomberg. Its five-year performance comes in at the top 15%.  

Fears of higher-for-longer rates have whipsawed markets this year, sending 10-year yields surging by more than 90 basis points at one point from a February low. Traders have been forced to pare bets of more than 150 basis points of easing starting in March to one quarter-point cut before the end of the year.

Some semblance of relief for bond traders came earlier this month after a measure of underlying US inflation cooled in April for the first time in half a year. Fed Chairman Jerome Powell also pushed back on the need to raise rates further and signaled cuts were coming as soon as warranted by data. 

That reprieve, however, didn’t last long, with yields edging back up. Ten-year benchmark yields were at 4.62% on Thursday, just 12 basis points shy of this year’s high. Minneapolis Fed President Neel Kashkari said Tuesday that while the US central bank’s policy stance is restrictive, policymakers haven’t entirely ruled out additional rate increases.

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The fund is buying T-bills to take advantage of the yields on offer at the “very front of the curve,” according to Miller.  

Also adding pressure on bonds is the US government’s borrowing plan, said Miller. The Congressional Budget Office’s estimates released February show the budget deficit swelling to $2.56 trillion by 2034 from $1.58 trillion this year.

“That has really got to push up interest rates longer term,” Miller said of the impact of the widening US deficit. 

--With assistance from Joanna Ossinger.

(Updates Treasury yields. An earlier version corrected reference to fund purchases of corporate debt in second and eighth paragraphs)

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