Hedge funds' net shorts on US 10-year futures rise; basis trades still in play

By Gertrude Chavez-Dreyfuss

NEW YORK, April 11 (Reuters) - Bearish bets on U.S. 10-year Treasury note futures from leveraged accounts or hedge funds hit their largest level since late October, Friday's data from the Commodity Futures Trading Commission showed, which is an indication that so-called "basis trades" in the bond market are alive and well.

Market players had speculated that since President Donald Trump announced on April 2nd a whole slew of tariffs for countries around the world that this popular fixed-income trade was being reversed because of the selloff in U.S. Treasuries. That selloff had pushed Treasury yields sharply higher.

Hedge funds are the major players in basis trades which seek to profit from the difference in price between Treasury futures and the underlying notes or bonds.

Leveraged funds' net shorts on U.S. 10-year note futures rose to 1,873,687 contracts 1043602LNET, according to the CFTC's latest Commitments of Traders data in the week ended April 8.

"It looks like there has been no unwinding of the basis trade in the latest week despite what people in the market said," said Jan Nevruzi, U.S. rates strategist, at TD Securities. "The hedge funds and asset managers have actually been adding to their positions."

In a basis trade, hedge funds would typically buy cash Treasuries and at the same time hedge that exposure by selling the 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, for their part, use long contracts in Treasury futures to meet certain portfolio requirements. They therefore have had persistently long positioning in Treasury futures.

CFTC data showed asset managers net longs on 10-year notes hit 2,058,426 contracts 1043602ANET, their highest since at least June 2006.

Hedge funds also added net shorts to other long-dated futures contracts such as Ultra 10-year notes 1043607LNET. Their net short positioning on this contract surged to their highest since November 2023.

At the same time, asset managers' net longs on ultra 10-year notes futures increased to a two-month high 1043607ANET.

On the front end of the curve such as two-year note futures, hedge funds reduced their net short positioning to 1,666,387 contracts 1042601LNET, their smallest level since April 9 last year.