Hedge funds who called treasuries wrong are now getting it right

[SINGAPORE] Hedge funds, who proved to be experts on getting the Treasury market wrong earlier this year, are becoming better at getting it right.

Large speculators including hedge funds trimmed their short positions in 10-year notes to almost zero last week, according to the Commodity Futures Trading Commission. Investors who dropped their bets on bonds falling are reaping the reward as the market rises in July following a three-month rout. Greece's struggle to stay in the euro currency bloc and tumbling Chinese shares are driving demand for the relative safety of US debt.

"Just in case, we want to keep a small long position," said Hajime Nagata, who invests in Treasuries in Tokyo for Diam Co, which manages the equivalent of $141 billion. Diam's holdings have a longer duration than the benchmark it uses to gauge performance, he said. Having a longer duration means bond prices will move more relative to any change in yield.

The benchmark 10-year US yield rose two basis points to 2.31 per cent as of 10:55 am in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.125 per cent note due in May 2025 fell 6/32, or US$1.88 per US$1,000 face amount, to 98 13/32.

Treasuries gave back some gains following a surge on Monday that sent 10-year yields down 10 basis points. US government securities started the week with a rally after Greece voted on Sunday to reject spending cuts that its creditors are demanding, increasing concern the nation will be forced out of the euro.

A 25 per cent plunge in the Shanghai Stock Exchange Composite Index during the past month is helping send investors to the safest assets.

Biggest Wager Speculators called Treasuries wrong earlier this year, increasing their net short position in 10-year notes to 261,282 contracts on the Chicago Board of Trade in the week ended Dec 30. It was the biggest wager against Treasuries since May 2010.

The 10-year yield slumped 53 basis points in January, the biggest monthly decline since August 2011.

Investors reduced their shorts in early February, and 10- year yields climbed 35 basis points that month, the biggest increase in a year and a half.

Their record improved throughout April, May and June as shorts outnumbered longs while Treasuries suffered a three-month selloff.

Now, with the short position at almost zero, Treasuries have advanced 0.4 per cent in July, based on the Bloomberg US Treasury Bond Index, vindicating those who gave up their bets on the securities falling.

BLOOMBERG