Hedge funds went into the Fed’s interest rate lift-off wagering on a stronger dollar and steeper U.S. yield curve, but have so far been wrong-footed as the dollar has since dipped slightly and the curve has flattened dramatically. Futures market data for the week through March 15, the day before the first rise in U.S. interest rates since 2018, showed that speculators increased their net long dollar position by the largest amount this year.
The data also revealed the biggest shift in favor of two-year Treasuries futures in over a year, a reduction in net short positioning that was twice as aggressive as the scaling back of funds’ net short position in 10-year bonds. Put together, that was effectively a bet that the two-year yield will fall faster than the 10-year yield, thereby ‘steepening’ the curve. The opposite happened.
The gap between two- and 10-year Treasury yields shrank by around 13 basis points to just 18 bps after the Fed’s rate hike….