NEW YORK, May 30 (Reuters) - Treasury market bears on Wednesday clawed back some of the crushing losses suffered a day earlier after anxiety about the instability of the Italian government triggered a safe-haven stampede into U.S. government debt, forcing those with bets on bond weakness to rush for the exits.
Data released on Wednesday from CME Group Inc showed open interest in its benchmark Treasury and interest rate futures contracts plunged by more than 400,000 contracts on Tuesday, signaling a frantic dash to close out wrong-footed positions.
Outstanding positions in 2-year Treasury note futures alone dropped by more than 266,000 contracts, meaning traders closed out more than 11 percent of all open interest in a single day. For 10-year futures, open interest fell by around 137,000 as trading volume in the benchmark contract hit a record.
"Some people were short coming in and then they flipped," Greg Adamsick, director of global futures and options at RCM Alternatives in Chicago, said on Wednesday.
Last week, hedge funds' net short positions in 10-year Treasury notes fell to the lowest level in nearly two months, while bond dealers raised net shorts in 10-year T-notes to the highest since February 2016.
"One would have to think a lot of short positions, especially weak ones, had to capitulate," said Mary Ann Hurley, vice president of fixed income at D.A. Davidson in Seattle.
Less than two weeks ago, the 10-year Treasury yield broke above 3.10 percent to its highest levels in nearly seven years on expectations of rising inflation and federal borrowing.
But since then, bond yields have begun retreating on worries about the renewed trade tension between China and the United States; cancellation of a nuclear summit between U.S. President Donald Trump and North Korean leader Kim Jong Un, and Turkey's economic policies under President Tayyip Erdogan.
Some analysts also reckoned Treasuries were simply oversold.
Although bond bears regained some footing as the market gave back some of Tuesday's dramatic gains, yields remained well below their seven-year high.
On Wednesday, the 10-year yield rose to 2.855 percent as Italian politicians scrambled for a deal to form a government, reducing some safe-haven bond holdings from the day before. The 10-year yield had fallen to 2.759 percent on Tuesday, which was the lowest since April 11, according to Reuters data.
The boon for U.S. Treasury securities on Tuesday resulted in a 0.952 percent total return on the day, the biggest one-day gain since July 29, 2011, according to an index compiled by Bloomberg and Barclays.
The reversal in market sentiment was captured by a closely followed survey from J.P. Morgan.
It showed that the share of J.P. Morgan's Treasury customers who are holding fewer longer-dated government issues than their benchmarks was equal to the share of customers who are holding more longer-dated bonds than their benchmarks on Tuesday.
This was the least bearish their clients were on Treasuries since April 2017.
In the short-term term, bearish bond bets remain vulnerable to political developments in Europe as Italy seeks to form a government and a possible no-confidence vote of Spanish Prime Minister Mariano Rajoy on Friday.
"I hardly think we are out of the woods," D.A. Davidson's Hurley said.
Reporting by Richard Leong; editing by Diane Craft