Some futures traders continue to hold bearish positions on bonds, with speculators adding to short bets and asset managers this month scaling back long positions. Hedge funds and other large speculators have had net bearish 10-year Treasury positions all year, according to Commodity Futures Trading Commission data through the week ended May 21.
As of the end of March, Michael Hasenstab had been loading up on interest-rate swaps in the $34 billion Templeton Global Bond Fund he manages in order to deepen an ultra-short exposure to duration, a measure of sensitivity to shifts in yields. The fund’s average duration has dropped every quarter for the past two years and stood at minus 2.21 years, according to filings. The fund doesn’t disclose holdings information in between quarterly filings.
The fund has slumped 1.3% in the past month, underperforming more than 80% of peers, according to data compiled by Bloomberg.
In comments made to Bloomberg News in February, Hasenstab forecast that the Fed would keep raising interest rates this year as U.S. labor markets remain “exceptionally strong” while wages and inflationary pressures continue to rise. In October, Hasenstab said 10-year yields could “ easily get above 4%.” That wager, along with big investments in select emerging markets, helped the Templeton Global bond fund post a 1.3% gain in 2018, compared with a loss for the FTSE World Government Bond Index.
At the moment, the main variables that bond wonks use to compute yields -- growth and inflation expectations, the outlook for monetary policy and how much extra compensation investors require to hold long-term bonds (dubbed term premium) -- all signal trouble for bond bears, according Jim Caron, fixed-income portfolio manager at Morgan Stanley Investment Management.
“The four factors that go into the basic construct of where 10-year yields will go all have a red arrow pointing down,” Caron said. “Yields are going lower.”
Worldwide demand for U.S. government debt has pushed the 10-year Treasury term premium to a record low of negative 0.84 percentage point as of May 28. The measure is a proxy for the extra compensation investors require to own the maturity rather than rolling over a shorter-dated obligation.
As for Jamie Dimon’s remarks about a 4% yield, JPMorgan spokesman Brian Marchiony had no comment. However, Dimon -- who obviously doesn’t personally make his living trading bonds -- has been clear that projecting the path of rates is a bit of a crystal-ball exercise.
“The notion that we know exactly what’s going to happen is wrong,” Dimon said in an interview with Bloomberg TV on May 8.
This article was provided by Bloomberg News.