(Bloomberg) -- The Treasury yield-curve collapse that followed this week’s Federal Reserve policy meeting cloaked a stampede of hedge funds that had been leaning the wrong way.
Short-dated Treasury yields rocketed higher, outpacing longer-dated ones Wednesday as expectations for Fed rate hikes mounted based on comments by Chair Jerome Powell. The spread between 5- and 30-year yields dropped to 48 basis points from 54 basis points that day, and reached 42 basis points Thursday, the tightest since the March 2020 liquidity crisis.
The move drew some of its vigor from stop-loss orders by trading accounts that were positioned for curve-steepening using futures and swaps, according to Citi strategists Ed Acton and Bill O’Donnell.
“Extended steepeners had been built” by so-called fast-money accounts, along with “extended shorts” in the 30-year, and as the curve has flattened, “these positions are all getting squeezed,” the Citi strategists said in a Jan. 27 note.
In particular, they said, profits on short positions in Ultra Bond futures are evaporating at prices below 190-24. The contract was trading at around 189 on Friday. Weekly positioning data from the Commodity Futures Trading Commission show that leveraged funds’ net short in the contract was the biggest since March 2020 just before the Fed meeting.
The flattener has stalled for now after mixed U.S. economic data including a bigger-than-expected slowdown in fourth-quarter employment costs.
“The hawkish surprises have continued but we think the flattening trend may be running out of steam,” HSBC strategists said in a note, recommending curve-steepeners in the U.S. and U.K.
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