Hedge funds have started 2023 betting that U.S. interest rates are close to peaking, that the Federal Reserve will keep them higher for longer and that the dollar will weaken slightly.
Judging by the economic data, financial market swings and talk from U.S. policymakers in the first week of the year, this would appear to be a reasonable - and reasonably consensus - macro strategy to employ.Commodity Futures Trading Commission data show that speculators closed 2022 with one of the smallest three-month SOFR rate futures short positions of the year, a light short dollar position, and substantial short positions cross the U.S. Treasuries curve.
The rapid reversal since then shows they are much more neutral on the rate and inflation outlooks this year and think the Fed is close to ending its hiking cycle, or they have taken profit on a highly lucrative trade. Or both. CFTC speculators' small wager on short-term U.S. rates stands in contrast to the substantial bets they still retain against two- and 10-year Treasuries, even though the end of the Fed's hiking cycle and economic slowdown are both coming into view.In the 10-year space, funds ended 2022 with their third largest net short position of the year, at 383,602 contracts.
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