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Not only are hedge funds ramping up their bets on a higher 10-year U.S. Treasury yield, they are doing so on a historic scale.

The latest move in Commodity Futures Trading Commission positions suggests speculators were undeterred by the market’s reaction to Federal Reserve Chair Jerome Powell’s Jackson Hole speech, or were banking on a bumper August U.S. jobs report.

Before Powell’s Jackson Hole address the 10-year yield was 1.35%, and before Friday’s non-farm payroll data - which showed a huge downside miss on job creation but a punchy spike in average earnings - it was 1.30%.

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It closed U.S. trading Friday bang in the middle of that narrow range at 1.325%. Clearly, the market lacks conviction to push it lower on the back of slowing growth, or lift it higher on any near-term inflation concerns.

The latest CFTC positioning data released late on Friday, however, suggest conviction among the fund and speculative trading community, at least, is strengthening.

In the week to Tuesday, Aug. 31, funds and speculators flipped their position in 10-year futures to a net short 29,819 contracts from a net long 113,312 contracts the week before.

This marks the first net short in eight weeks. But more significantly, the position shift of 143,131 contracts marked the biggest weekly swing against Treasuries in three years, and the seventh biggest ever.

Funds also accelerated their selling of 2-year Treasury futures, swelling their net short position to 20,750 contracts from 9,366 the week before. That is light positioning, historically, but still the heaviest bet on higher short-term yields for five weeks.

Again though, this bet on rising short-term yields has yet to bear fruit, as the two-year yield drifted lower in that week to around 21 basis points.

The huge swing in favor of shorting the 10-year points and more modest short position in the two-year space suggests speculators continue to expect the yield curve to steepen.

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In recent weeks, at least, this has happened. The spread between two- and 10-year yields on Aug. 20 was around 100 basis points, and on Friday it was around 112. It steepened a sizeable 4 bps alone on Friday.

“Inflation concerns and a less hawkish Fed can push the curve steeper, and we continue to like 2s10s steepeners,” Citi’s rates strategy team wrote in a note on Friday.

If hedge funds doubled down on their bearish view on Treasuries, they also strengthened their bullish on the dollar.

The value of funds’ net long dollar position against a range of G10 and emerging currencies rose to $10.7 billion from $8.4 billion the week before. That marks the seventh consecutive week of net long positions, and the biggest since March last year just before the pandemic-triggered lurch to a 16-month bet against the dollar.

The refusal of yields to move higher, deteriorating U.S. economic data, renewed COVID-19 concerns and the Fed likely delaying its taper announcement have all weighed on the dollar. It has fallen steadily since hitting a nine-month high against a basket of currencies on Aug. 20, losing 2% in that time.

But as Jonathan Peterson at Capital Economics points out, other developed countries also face slowing growth and rising number of cases of the COVID-19 Delta variant. This may force these central banks to tighten policy more gradually than investors expect.

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“This, combined with our view that inflationary pressures in the U.S. will remain stronger than in other major economies and more persistent than generally anticipated, continued to underpin our forecast for higher U.S. bond yields and a stronger dollar,” he said.

According to industry data provider Preqin, macro strategy hedge funds gained 0.06% in August, bringing year-to-date gains to 5.18%. They are significantly under-performing Preqin’s broad hedge fund all strategies index, which rose 1.44% in August and is up 12.69% in the January-August period.

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