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Asset Managers Exercise Caution in Treasury Futures Amid Rate Hike Speculations


Michael Chen

March 27, 2024 - 09:19 am


Shifting Trends: Asset Managers Adopt Cautious Stance on Treasury Futures

In a discernable shift in strategy leading up to the Federal Reserve's latest policy meeting, asset managers have progressively tapered their bullish bets on Treasury futures, causing net long positions amongst institutional investors like pension funds and insurance companies to plummet to their lowest point in eight months.

The sharp reduction in these bets, as detailed in the data from the Commodity Futures Trading Commission (CFTC) up to March 19, correlated with a rise in US yields starting from early February. This surge was spurred by investors recalibrating their expectations for rate cuts in light of persistent inflation. The broad sell-off in Treasuries was not just a reflection of market movements but also indicated that some money managers may have been scaling back on basis trades, those that aim to capitalize on discrepancies between Treasuries and futures prices, and instead could be shifting their focus towards credit.

US Treasuries experienced a downturn before the Fed convened for the two-day policy assembly, only to see a reversal and subsequent rally when the Fed sustained its projection for three interest rate reductions within the current year. Although this sparked a turnaround in the cash market, the shake-up in Treasury futures bets could persist, as derivatives markets generally lag behind the bond markets, according to a report by Bank of America strategists, including Meghan Swiber, published Monday.

Furthermore, latest intelligence from the financial realm suggests that the willingness to engage with interest-rate risk in the cash market is surging. JPMorgan Chase & Co.’s most recent client survey, released on a Tuesday, illustrated that investors harbored the most optimistic outlook on Treasuries since December, when measured on a net-long basis.

Unwinding Treasury Futures Amid Rate Hike Uncertainty

The brand of unwinding witnessed among asset managers replicates a cautious approach to the evolving market landscape. A deep dive into the numbers reveals that, as per CFTC data, asset managers eliminated roughly 89,000 10-year bond futures equivalent net long positions within the period ending March 19. This marks the sixth instance of deleveraging in the course of the last seven weeks. Since February 7, the unwinds tally has escalated beyond 1 million 10-year note futures equivalents, culminating in the nadir of net longs since the previous July.

The gravitas of the recent pullback from asset managers captured the long bond, ultra-long bond, and two-year futures, mounting to a combined risk worth approximately $8.2 million per basis point, referenced from the CFTC data. Animated by different market sentiments, hedge funds amplified their bullish stances on futures married to the Secured Overnight Financing Rate (SOFR)—which echoes the central bank's pivotal policy rate—with a pronounced boost to their net long positions in the week preceding the Fed's policy declaration on March 20.

Growing Appetite for Treasuries in the Cash Market

In the continued evolution of market dynamics, the most recent Treasury client survey from JPMorgan signaled a marked increase in net long positioning, reaching levels not seen since the end of the previous year.

Trends in Treasury Options: A Bullish Turn

Strategies employed in the options market further underscore the shift in sentiment. In the preceding week, an immense volume of Treasury options transactions, chiefly via the purchasing of May and June calls on 10-year note futures, shifted the 10-year call/put skew. Calls were favored the most since the previous February before the trend slightly receded towards a neutral stance. Notable transactions from that week included both significant buys of the May 114.00/114.50 call strips and the substantial acquisition of June 114.50 calls with a May 24 expiry.

Investors have also targeted a substantial reduction in the 10-year yield through multiple Treasury options trades. The heavy inflows into Treasury options hint at a massive wager on increased volatility, with estimations around $65 million embarking on a long volatility position.

The Buzz Around SOFR Options

In another intriguing development, the demand for inexpensive downside options plays has recently surfaced with frequent trades across various SOFR tenors. The targeted sentiment suggests the Federal Reserve might maintain higher interest rates for an extended period than what current market expectations reflect, possibly even freezing rates at the June meeting. The Tuesday prior to the news release was prevalent with buyers engaging in put structures for both July and August SOFR options. The previous week's most substantial position additions were predominantly in the 94.6875 strike. The market has shown favoritism for particular strategies such as the SOFR Jun24 94.8125/94.75/94.6875 put butterflies and the SOFR Sep24 95.00/94.6875 1x3 put spreads.

SOFR Options Heat-Map Analysis

The analysis of the SOFR options heat-map indicates that the most populated SOFR strike reaching out to December tenor is the 95.50, aiming for a 4.5% yield. The bulk of interest within this strike revolves around the Jun24 puts and is also representative of the significant open interest at the 95.00 strike. Additional strikes noting high activity include 95.25, 94.875, and 96.00, all reinforced with substantial June put holders.

In conclusion, these shifting strategies and diverse market developments signify an evolving landscape in asset management, with a notable tactical withdrawal from bullish Treasury future positions and an amplified focus on interest-rate risks.

For further information, the source of the original data, graphs, and strategic analyses discussed throughout this article can be found at the following URL: , CFTC, Bloomberg

The comprehensive report encompasses a detailed scrutiny of asset managers' attitudes towards Treasury futures, coupled with insights on the overarching trends within SOFR options. Analysts, strategists, and investors alike can delve into the data to better understand the broader implications of these movements as they evolve within the current economic context.

With the potential for further unwinding of Treasury futures bets on the horizon, the market remains attuned to the Fed's signals for future policy directions. These strategic moves among asset managers reflect not just the anticipation for interest rate moves but also an agile responsiveness to burgeoning economic indicators, with inflation figures being a primary driver of current sentiments.

The state of the US Treasury market and the positions of managers will continue to be a key barometer for the health of the global financial system. As the data and trends illustrate, there is an intricate interplay between the derivatives market and the actual bond market that necessitates careful analysis. The deduction of these patterns provides substantial foresight into the probable avenues the financial markets may explore as they navigate through a period of economic recalibration and interest rate volatility.

Asset managers and institutional investors are urged to monitor the strategies that have unfolded in the lead-up to and subsequent to the Federal Reserve's announcements. The data suggests that managers must remain versatile, ready to alter their positions in light of new economic data and the shifting regulatory tide. Whether this prudence and reduction in futures bets continue will largely depend on the forthcoming economic indicators and policy decisions that emerge in the near future.

As we advance, surveillance of the Treasury's cash market and derivatives segments will prove critical for a comprehensive understanding of the inflows and outflows of 'real money' investors' positions. The intricate mechanics of SOFR options, and the range of strikes favored by investors, will serve as indicators of market expectations and sentiment regarding future interest rate paths.

In conclusion, the shifts in Treasury futures bets ahead of the Federal Reserve's meetings and the contrasting movements in SOFR options illustrate the dynamic and often divergent perspectives within the financial markets. Observers and participants alike will need to stay informed on these developments as they unfold and continue to dissect the implications of such strategies in the broader market dialogue.