Diminishing Hedge Fund Bond Shorts Point to Basis-Trade Unwinds

(Bloomberg) — Leveraged funds are aggressively unwinding short-duration positions in Treasury futures. While hedge funds appear to be cashing in on bearish wagers as Treasury yields remain elevated, part of the unwind may be reflecting a moderation to the futures-versus-cash basis trade. 

The basis unwind narrative is also supported by positioning data among asset managers, which has shown net long positions being cut over the past four weeks for a combined 830,000 10-year note futures equivalents, in CFTC data up to Feb. 27. Over the same period, leveraged funds have reduced their net duration shorts by roughly 825,000 10-year futures. 

Read More: Treasuries Basis Trade Shows Signs of Waning, Deutsche Bank Says

The unwind has left leveraged funds at their least short since July. Asset managers, after a similar amount of position unwinds, are at their least long since August. 

Behind the recent aggressive position covering lies another factor: The timing has coincided with the March to June roll period in the Treasury futures market. This would mean the recent deleveraging trend among hedge funds could now flip and start to reflect a rebuild of fast money short positions in the newly front-dated June futures contract.

Meanwhile in the cash market, JPMorgan’s latest survey of Treasury clients shows long positions climbing to the biggest in a month, shifting out of neutral positions. 

Here’s a rundown of the latest positioning across the market:

Leveraged Unwinds

CFTC positioning data in the week up to Feb. 27 showed hedge funds covering short positions by a combined 308,000 10-year note futures, the biggest week of covering seen since November, to leave overall net duration shorts at the least since July.   

Meanwhile asset managers have been unwinding net long positions at a similar rate. Latest data shows net long positions drop by roughly 307,000 10-year note futures equivalent. Asset managers are now sitting at the least net long since August. 

Cash Longs on the Rise

JPMorgan’s latest Treasury client survey in the week up to March 4 showed longs climbing 4ppts to highest since Feb. 5. Short positions rose 3ppts with neutrals dropping 7ppts on the week. 

Bearish Skew

In the long-end of the curve, options skew on long-bond futures was less negative, indicating traders are paying a lower premium to cover a selloff in the long-end of the curve, as cash yields eased over the past week after rejecting a move through 4.50%. Since a Feb. 22 peak, the 30-year yield has dropped from as high as 4.499% to 4.255% late Tuesday.   

Most Active SOFR Options  

Over the past week there has been robust action in the 95.50 strike in options across Mar24, Jun24 and Sep24 tenors. Most of the positioning has been added via Jun24 and Sep24 calls. Flows over the past week have included large buyers of SFRM4 95.50/95.75 call spread and the SFRM4 95.25/95.50/95.75 call fly. Largest liquidations seen over the past week in the 95.25 strike with position unwinds seen in both Sep24 calls and puts on the strike. 

SOFR Options Heat-Map

The most populated strike in SOFR options out to the Sep24 tenor continues to be the 95.00 strike, or 5% rate, where a large amount of Mar24 calls remain. Other heavily populated strikes include 94.875 and 94.75 strikes, along with the 95.25 strike where a large amount of positioning sits.

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