The number of net-long contracts in 10-year futures held by leveraged accounts stood at 540,397 as of March 12, from 562,057 the prior week. The last time bullish wagers were as high was in August 2007.
No ‘Pivot’
There was a net-short position, or bets on rising yields, in July, as rates began to rise from the record low, generating a loss of about 1 percent over the final five months of the year as measured by Bank of America Merrill Lynch indexes.
The total position of leveraged accounts in all interest rate contracts, are $40.4 billion, compared with the record $50.8 billion in December, based on CFTC data tracked by Royal Bank of Scotland Group. These accounts were last year as much as $28.5 billion net short in May.
“It’s not a pivot point for rates right now,” said James Conklin, co-chief investment officer at Greenwich, Connecticut- based $1 billion hedge fund QFS Asset Management LP and former head of investment research at FX Concepts, a currency fund, in a March 15 telephone interview. “An aggressive short in Treasuries is early at this point.”
Whether bond prices rise or fall, many investors see an opportunity to profit from the gap between short- and long-term yields, which are about double the average since 1977.
An investor buying seven-year notes today yielding 1.34 percent would own a security with five years left to maturity in 2015. The current five-year note yields 0.76 percent. That means if yields don’t change, a $10 million investment would earn $531,000, a return of 5.31 percent before leverage.
Printing Money
“The cost of being underinvested in the Treasury market eats you alive every single day,” said NineAlpha’s Evans.
Bernanke told Congress last month that the Fed will keep the benchmark lending rate between zero and 0.25 percent, where it’s been since December 2008, until unemployment falls below 6.5 percent, providing the inflation rate is under 2.5 percent.