Hedge funds are the most bullish on 10-year Treasuries since 2007, betting the U.S. economy is too fragile for the Federal Reserve to stop buying bonds even as the jobless rate drops to the lowest in four years and household wealth climbs.
Investors using borrowed funds to boost returns, so-called leveraged accounts, held $56.2 billion in contracts wagering on gains in 10-year Treasury futures in the week ending March 5, data from the Commodity Futures Trading Commission show. That’s the most since just before credit markets froze and the economy went into recession, sparking a rally in government bonds. As recently as July, there were net bets against the Treasuries.
Rather than heading into a bear market after annual returns of 9.5 percent since mid-2007, hedge funds see value in longer- term U.S. debt because of the minimal risk of sudden inflation and higher yields relative to other sovereign securities. Fed Chairman Ben S. Bernanke told Congress Feb. 26 that benefits of buying $85 billion of Treasury and mortgage bonds a month outweigh the potential harm from rising inflation as a result of the purchases.
“It’s just really expensive to fight the Fed,” Jason Evans, co-founder of hedge fund NineAlpha Capital LP in New York and the former head of U.S. government bond trading at Deutsche Bank AG, said in a March 14 telephone interview. “Whether yields have begun a structural rise is not the million dollar question, it’s the multibillion dollar question.”
The economy’s weakness was illustrated March 15, when a measure of consumer confidence fell to the lowest level since 2011. The Thomson Reuters/University of Michigan preliminary sentiment index for March dropped to 71.8 from 77.6 in February. The gauge was projected to rise to 78, according to the median estimate of 67 economists surveyed by Bloomberg.
Yields on 10-year Treasuries extended declines from last week as turmoil over a planned tax on Cypriot bank deposits boosted demand for refuge assets. The rate dropped three basis points, or 0.03 percentage point, to 1.96 percent at 12:20 p.m. in New York, according to Bloomberg Bond Trader prices. It slid as much as nine basis points to 1.90 percent, the lowest since March 6 and the biggest intra-day drop since Feb. 25.
The price of the 2 percent security due February 2023 added 12/32, or $3.75 per $1,000 face amount, to 100 12/32.
While the yield is down from more than 5 percent in July 2007, it’s up from a record low of 1.38 percent in July 2012 as more investors switch to riskier assets amid gains in jobs and housing. Economic growth will reach 2.7 percent by year-end from 0.1 percent last quarter, based on the median estimate of economists surveyed by Bloomberg. The Standard & Poor’s 500 Index of stocks is up 10 percent this year, including reinvested dividends.