Gundlach: Hedge funds could see short squeeze on record Treasurys bets

Jeffrey
Gundlach.
Thomson
Reuters

• Hedge funds are making record bets against long-term US
  Treasurys.
• Jeff Gundlach, the founder of DoubleLine Funds, warns
  that these investors could be in for pain if Treasurys in fact
  rally.
• Speculators have nailed the drop in Treasurys (and rise
  in yields) so far this year, but their record wagers are a
  concern for Gundlach.

Investors who are betting against US Treasurys could be setting
themselves up for massive losses ahead, according to Jeff
Gundlach.

The DoubleLine Funds founder and fixed-income maven sent a
warning via Twitter on Friday after data from the Commodity
Futures Trading Commission showed hedge funds had piled on record
bets against 10- and 30-year Treasurys.

Andy Kiersz/Business Insider

Speculators have been on the right side of the trade so far this
year. In late April, the 10-year yield, which rises when the
underlying note’s price falls,
topped 3% for the first time since 2014. It has since
retreated and was at 2.842% on Monday, up about 44 basis points
from the beginning of the year.

The drop in yields this year has shrunk the difference between
short- and long-term bonds — plotted on the yield curve — to the
smallest since the financial crisis. It has
turned negative before every recession since the 1960s, and
so its approach toward zero has been the subject of much debate
in markets.

If the trend in yields reverses, however, hedge funds could face
a so-called short squeeze as they’re forced to close out their
positions, pushing Treasury yields downward even faster.

Twitter/@TruthGundlach

There are market-moving events just ahead this week that could
test hedge funds’ conviction against Treasurys. On Wednesday, the
Federal Reserve will release minutes of the
policy meeting it held earlier this month. And on Friday, Fed
Chairman Jerome Powell is scheduled to speak on monetary policy
at the Jackson
Hole symposium, an annual meeting of central bankers.

One strategist on the other side of the popular short trade is
Matthew Hornbach, Morgan Stanley’s global head of interest-rate
strategy.

“Government bonds are mounting a second attempt this year at a
tactical bull market, the first of which was ended prematurely by
Bank of
Japan policy,” Hornbach said in a note Friday. Treasurys sold
off and the 10-year yield topped 3% again on August 1 after the
Japanese central bank indicated it was willing to prolong its
accommodative monetary policy even though other countries were
tightening.

“The ensuing rally should mark the end of the cyclical bear
market that began in late 2017,” Hornbach said. “We still suggest
long UST 10y and UKT 10y positions.”

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