Bernanke's Warning Spurs Record Bets Against Two-Year Notes
By Elizabeth Stanton
May 14 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's inflation concerns have prompted investors to make a record bet against $88.8 billion of two-year Treasuries.
That's the amount of futures contracts on notes traders have sold at the Chicago Board of Trade, the most since the Commodity Futures and Trading Commission began keeping track of the data in 1993. It exceeds wagers to profit from rising prices by $51.8 billion, the largest so-called net short position ever, according to CFTC data released May 11.
Speculation on a decline in the short-term Treasury notes has more than doubled in the past two months as the economy weathers the worst housing slump in a decade and Fed officials signal they have no intention of cutting their target rate for overnight loans between banks anytime soon. Two-year notes are more sensitive to changes in interest rates than longer-term debt.
``The rate cuts that people have been expecting in earnest late last year and early this year have slowly been priced out,'' said Brian Carlin, head of fixed-income trading in New York at JPMorgan Private Bank, which oversees $100 billion. He has clients betting against two-year notes.
The growth shows how much sentiment has shifted among traders, who were convinced the housing slowdown would prompt the central bank to cut rates to 4.5 percent from 5.25 percent this year as recently as March. Options contracts based on the target rate now show traders are anticipating one quarter-point reduction.
CFTC Record
The figures come from the Commitments of Traders report that the Washington, D.C.-based CFTC has published weekly since 2000 and monthly since 1962. The commission requires traders who've bought or sold 1,000 or more two-year contracts to disclose their positions. Each contract covers $200,000 of notes.
Traders are classified as speculators if they use futures mainly to profit from swings in bonds, compared with investors who are hedging investments.
Fed policy makers voted on May 9 to keep benchmark rates unchanged and reiterated their concerns about rising consumer prices. ``The committee's predominant policy concern remains the risk that inflation will fail to moderate as expected,'' the Federal Open Market Committee said in a statement.
The decision sought to reassure investors that the central bank remained focused on the threat of accelerating prices. During its March 21 meeting, Fed officials dropped a reference to ``additional firming'' in policy, leading some analysts and traders to conclude the central bank would reduce rates.
No Policy Change
Bernanke told lawmakers a week later that the Fed had not changed its stance. ``Our policy is still oriented toward control of inflation,'' Bernanke told Congress in a March 28 hearing.
Yields on two-year notes have risen 20 basis points, or 0.2 percentage point, to 4.71 percent since hitting a 13-month low on March 13. The price of the 4 1/2 percent note due in April 2009 fell 2/32, or 63 cents per $1,000 face value last week to 99 19/32.
Industry and government reports in the past month have supported the Fed's forecast for moderate growth and slowing inflation. The Institute for Supply Management's factory index rose in April to the highest level in almost a year. The Fed's preferred measure of inflation, personal spending on items excluding food and energy, was unchanged in March, the Commerce Department said last month.
Convincing Trend
``Trends weren't forming to convince us the Fed was going to be easing as soon as the market was projecting,'' said Sean Simko, who oversees $4.5 billion at SEI Investments Co. in Oaks, Pennsylvania. SEI sold Treasuries due in 2009 and bought notes maturing in three to five years because investors had become overly optimistic, he said.
The record bets against the two-year note may indicate less about sentiment than it once did because of increased computer- guided trading linked to other markets, said Woody Jay, who started working in the bond market in 1981 and was head of Treasury trading at Lehman Brothers Inc. until 2005.
The rise in program trading has diminished the ``informational value'' of knowing which way large speculators are leaning, said Jay, managing partner at Rock Ridge Advisors, which runs a fixed-income hedge fund in Greenwich, Connecticut.
One reason investors are betting against two-year notes is that yields on the securities are 54 basis points below the Fed's overnight rate. The last time the two-year yield was more than 60 basis points below the target was in November 2000, two months before the central bank began a series of 11 interest rate reductions.
Sweet Spot
The futures bet on a rise in two-year yields is a sign that many investors are ``skeptical we are going to see such aggressive rate cutting over the coming year,'' said Ciaran O'Hagan, a strategist at Societe Generale in Paris.
The price of the two-year note futures contract expiring in June closed May 11 at 102 4/32, down 10/32 from March 30, producing a gain for traders who had sold it.
There were 6.4 million Treasury contracts outstanding at the end of April, up 80 percent since the end of 2005. Two-year contracts increased the most, nearly tripling to 1.1 million.
``The two-year area is to me the sweet spot of the curve right now,'' said Robert Corvino, vice chairman of the Chicago Board of Trade and an independent trader of Treasury futures since 1984. ``It is going to be most sensitive to a Fed move or non-move,'' said Corvino, who specializes in the two-year contract.
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net
Last Updated: May 13, 2007 14:16 EDT |
