This strategy appears reasonable based on economic data, financial market swings, and talk from U.S. policymakers in the first week of the year.
Commodity Futures Trading Commission (CFTC) 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.
Funds' U.S. interest rate expectations reached fever pitch around August and September last year when their net short position exceeded 1 million contracts. 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.
Funds trimmed their net short exposure to two-year Treasury futures in the week through Jan. 3 - but only slightly - to 521,508 contracts, still one of the largest ever.
Since hitting a 15-year high of 4.30% in October the 10-year yield has fallen; it closed at 3.57% on Friday. The yield curve inversion deepened in that time too, meaning the 10-year yield fell further below the two-year.
