UPDATE 1-Hedge funds less bearish on US two-year futures, shorts hit lowest since Sept, CFTC data shows

Adds details, CFTC table, context, byline

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 6 (Reuters) - Leveraged funds, or hedge funds, were less bearish on U.S. Treasury two-year futures in the latest week, cutting their net short positioning on this maturity to their lowest level since September, according to data from the Commodity Futures Trading Commission released on Monday.

CFTC data showed that in the week ended Dec. 31, leveraged funds' net shorts on two-year note futures fell to 2,308,104 contracts 1042601LNET, the lowest since Sept. 24.

U.S. two-year yields in the last week of December fell about 5 basis points, suggesting more longs on this security. The yield was last down 1.5 bps at 4.264% US2YT=RR.

Asset or institutional managers, meanwhile, reduced their net longs on two-year futures to their lowest since Dec. 10 to 2,098,761 contracts 1042601ANET after hitting record longs in mid-November.

Analysts said these moves reflected position-squaring going into the year-end.

In other maturities, hedge funds raised their net shorts on U.S. Treasury 10-year note futures to 1,502,903 contracts 1043602LNET. Prior to the latest week's increase in net shorts, hedge funds had been steadily reducing such positioning after hitting record levels around mid-August last year.

Asset managers, on the other hand, increased their net longs on 10-year futures to 1,636,438 contracts, the highest since early November. In late October, their net longs on this security hit an all-time peak.

Positioning in the Treasury futures market also reflects the presence of so-called basis trades: an arbitrage trading scheme that profits from the difference in the price between cash Treasuries and their futures.

In a basis trade, hedge funds would typically buy cash Treasuries and at the same time, hedge that exposure by selling futures to asset managers, who will end up holding a long position on them. Hedge funds then promise to deliver the underlying bond to the asset manager at a specific date at a preset price.

Asset managers have also used long contracts in Treasury futures to meet certain portfolio requirements. They have therefore had persistently long positioning in futures.

Meanwhile, non-commercial traders, which the CFTC defined as market participants who take a speculative position in futures without any direct business interest in it, increased net shorts across the board from U.S. two-year futures to long Treasury bonds. Non-commercial traders used to be the most active participants in Treasury futures, but their activity has been eclipsed by leveraged accounts in recent years.

Below is a table of the speculative positions in Treasury futures on the Chicago Board of Trade in the latest week. They represent non-commercial traders.

U.S. 2-year T-notes (Contracts of $200,000)

U.S. 5-year T-notes (Contracts of $100,000)

U.S. 10-year T-notes (Contracts of $100,000)

U.S. T-bonds (Contracts of $100,000)

U.S. Long T-bonds (Contracts of $100,000)

Fed funds (Contracts of $1,000,000)

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jamie Freed)

((gertrude.chavez@thomsonreuters.com; 646-301-4124))