Funds amass record wager on hawkish Fed as Jackson Hole looms: McGeever

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ORLANDO — As global markets’ focus rests squarely on Fed chief Jerome Powell’s keynote address at Jackson Hole on Friday, hedge funds have built up their largest-ever bet on higher U.S. interest rates.

Not only are they holding a record short position in “SOFR” rates futures of almost 1 million contracts, according to Commodity Futures Trading Commission data, but the pace at which they have accumulated that wager has been startling.

Traders have pushed the Fed’s terminal rate implied by SOFR rates futures back up towards 3.70% from around 3.25% at the start of August. They now expect the fed funds rate to peak in March next year.

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The latest CFTC report shows that speculators’ net short position in three-month Secured Overnight Financing Rate futures stood at a record 956,971 contracts in the week ending Aug. 16.

That is up from under 800,000 contracts the week before. The net short position has virtually doubled in the past month.

A short position is essentially a bet that an asset’s price will fall, and a long position is a bet it will rise. In bonds and rates, yields fall when prices rise, and move up when prices fall.

Some Fed officials are warning of the dangers to growth from tightening policy too aggressively, inflation indicators point to a peak in the rear-view mirror, and some economic activity indicators have been much weaker than expected.

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But funds are betting that the Fed will not relent until it is certain that inflation is firmly on a path back down to the central bank’s 2% target. This is the stance they expect Powell to take at the Kansas City Fed’s annual policy jamboree in Wyoming.

“We believe he will push back against the idea that a ‘pivot’ to more dovish policy is coming anytime soon. Instead, we expect he will remain steadfast that ‘ongoing’ rate increases are needed to regain price stability,” JP Morgan’s Michael Feroli and team wrote on Friday.

CFTC data also shows that funds increased their bearish bond bets right across the Treasury curve, especially in five-year futures. They expanded their net short by more than 100,000 contracts to 467,375 contracts, the biggest net short since March and a whisker from being the largest since 2018.

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Speculators increased their net short position in two-year Treasury futures to 214,048 contracts, the biggest net short since May last year, CFTC data shows.

The hawkish sentiment dominating U.S. fixed income markets – the 10-year yield is back up near 3% and the inversion of the 2s/10s yield curve has halved to around 25 bps – is, unsurprisingly, filtering its way into the currency market.

The dollar has rediscovered its mojo, and the euro is back to with half a cent of parity with the greenback. The CFTC data shows hedge funds’ net short euro position is now the biggest since February 2020, just before the pandemic.

Related columns:

Hedge funds strike it right on dollar, yield curve (Aug. 15)

Fed’s Powell could use Jackson Hole to flesh out QT thinking (Aug. 12)

Breakdown in ‘breakevens’ holes inflation buffer (Aug. 10)

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

(By Jamie McGeever in Orlando, Fla. Editing by Matthew Lewis)