How Hedge Funds Are Positioned

Following futures positions of non-commercials are as of February 25, 2020.

10-year note: Currently net short 274k, down 32.2k.

There it goes! The 10-year Treasury yield (1.13 percent) pierced through the lows from July 2012 and July 2016 – 1.39 percent and 1.34 percent, respectively. The 30-year yield already fell to a new low last week and made another low this week to end at 1.67 percent.

The long end of the Treasury yield curve is begging the Fed to jump into action. In the futures market, a 25-basis-point cut is baked in in next month’s meeting, slated for 17-18, with nearly half betting for a 50-basis-point move. By December, markets expect the benchmark rate to be a full percentage point lower!

The problem is, the fed funds rate is already at a range of 150 to 175 basis points. Six 25-basis-point cuts, and rates will be zero bound. Then what?  Negative rates?  The euro zone and Japan – and a few others – tried that, with not much to write home about.  Corporate bonds?  Once again, both the ECB and the BoJ tried that, and once again, the record speaks for itself.  Equities? The BoJ does buy equity ETFs, and the less said the better about that. These banks already have bloated balance sheets. The point is, central banks are running out of ammunition. The reason why they are increasingly calling for aggressive fiscal spending in the first place.

In this environment, the thing to watch is not what new tools the Fed – or other major central banks – come up with, rather how equities react, or whether or not the initial positive reaction to central bank action will be lasting.

30-year bond: Currently net short 70.7k, up 20.4k.

Major economic releases next week are as follows.

The ISM manufacturing index (February) is published Monday. In January, manufacturing activity increased 3.1 points month-over-month to 50.9.  This was the first 50-plus reading in six months.

Wednesday has on tap the non-manufacturing index (February). Services activity rose six-tenths of a point m/m to 55.5 in January – a five-month high.

Productivity (4Q19, revised) and durable goods orders (January, revised) are due out Thursday.

Preliminarily, non-farm output per hour rose at a seasonally adjusted annual rate of 1.4 percent in 4Q19.

In the 12 months to January, orders for non-defense capital goods ex-aircraft – proxy for business capex plans – rose 0.9 percent to $69.6 billion (SAAR).  Orders peaked in July 2018 at $70 billion.

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