April 30, 2018 / 1:58 PM / a year ago

COLUMN-Hedge funds take higher U.S. bond yields bet to record levels: McGeever

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Jamie McGeever

LONDON, April 30 (Reuters) - The 10-year U.S. Treasury yield's rise above 3 percent last week for the first time in over four years may be cause for concern across wide swathes of financial markets, such as equities and emerging markets.

But not for hedge funds and speculators in fixed income.

They'll be hoping the benchmark for global borrowing costs rises even further, because their collective bet on higher U.S. bond yields has never been greater.

Commodity Futures Trading Commission figures show that this segment of the investment and trading community are now holding the biggest short position in 10-year and five-year U.S. Treasury futures since the data series began in 1995.

A short position is effectively a bet that the price of an asset, in this case five- and 10-year U.S. Treasuries, will fall. As bond prices fall, yields rise.

The latest CFTC figures show that speculators' and hedge funds' net short position in 10-year Treasury futures is now 462,133 contracts, an increase of just over 90,000 contracts on the week.

They also increased their net short position in five-year Treasuries by around 18,000 contracts to a new record, 591,849.

The speed and extent to which speculators have turned on U.S. bonds is remarkable. Less than a year ago they held a net long position in 10-year paper of 362,000 contracts, the largest in a decade. As recently as December they were still long 10-year bonds.

The 10-year U.S. yield, against which trillions of dollars of loans and investments around the world are priced, has risen 55 basis points so far this year. It hit the 3 percent mark last week for the first time since January 2014.

The Fed has raised U.S. interest rates six times since December 2015 and markets are pricing in at least two increases this year. Other central banks are keen to follow suit and draw the post-crisis era of easy money to an end too.

The question is whether 3 percent acts as a springboard to even higher levels or not. Certainly, it offers an attractive level for longer-term investors such as pension and insurance funds to lock in a relatively decent yield, and will tempt some portfolio managers to buy bonds rather than equities.

And there will be doubts over how much more speculators can add to their record short position.

Importantly, the yield didn't break above 3.041 percent, the peak from January 2014. If that gives way, the 10-year yield will be at levels not seen since July 2011.

But given the pace with which bonds have sold off this year, a period of consolidation might be at hand. The 10-year yield is currently lower as the trading week gets under way, nestling around 2.95 pct.

CFTC speculators also made notable adjustments to their short dollar position, cutting it by the biggest amount in more than two months and reducing their record long euro position by the most this year.

Hedge funds taking a position in Treasuries are also usually active in the U.S. dollar, and the link between the two this year has been pretty tight. As they've upped their short bond position, they've increasingly gone short the dollar too. But not last week.

In the latest week they reduced the value of their short dollar position against a range of developed and emerging currencies by $4.38 billion to $23.81 billion.

They cut their net long euro position to 130,594 contracts from a record 151,476 the week before, the biggest reduction since December. If the dollar carries on the way it's gone the last couple of weeks, these bets will be cut even further.

The greenback has rallied 3 percent in the past fortnight, and looks to have broken out of the range it's been stuck in since early February. From being on the verge of making an assault on $1.25, the euro could now be vulnerable to a fall below $1.20.

Reporting by Jamie McGeever; Editing by Kevin Liffey

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