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(Bloomberg) — Hedge funds picked just the right time to boost bearish bets on Treasuries by the most since March 2013.
Large speculators including hedge funds increased net short positions in 10-year notes by 128,601 contracts to 164,264 in the week ended Nov. 3, data from the Commodity Futures Trading Commission show. Treasury yields rose to the highest since July on Monday, after data at the end of last week showed U.S. employers unexpectedly added the most jobs this year in October. Traders see a 68 percent chance the Federal Open Market Committee will raise interest rates at its December meeting, up from 56 percent odds before the payroll data, assuming the effective fed funds rate averages 0.375 percent after liftoff.

“It removed any doubt or uncertainty I had” that the Fed would raise rates this year, said Christopher Sullivan, who manages $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “We have sentiment turning, and the market attempting to more fully price in expectations for December.”

Sullivan is trying to minimize his exposure to fixed-income investments with high duration, or sensitivity to moves in interest rates.

The U.S. 10-year note yield rose two basis points, or 0.02 percentage point, to 2.34 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, after touching the highest since July 21. The 2 percent Treasury maturing in August 2025 fell 5/32, or $1.56 per $1,000 face amount, to 97.

Treasury Auctions

The Treasury sold $82 billion in bills and notes Monday, including $24 billion in three-year debt that yielded 1.271 percent, the highest since April 2011. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.82, the lowest for that maturity since October 2009. Indirect bidders, a class of investors that includes foreign central banks and mutual funds, bought 40.8 percent of the securities, the lowest since November 2014.

Still, the debt yielded less than the level implied by the market before the sale, according to analysis from Stone & McCarthy Research Associates. That’s encouraging, according to Larry Milstein, managing director of government-debt trading at R.W. Pressprich in New York, since an additional $40 billion of U.S. 10-year and 30-year debt will be sold this week. The yields of both securities are trading at their highest levels since July.

“The positive auction results gave people some comfort that we’re going to be able to take down this supply,” Milstein said. “If we can get through the week at these levels, it’s a positive for the market.”

‘Live Possibility’

The Labor Department said the U.S. gained 271,000 jobs last month, following an increase of 137,000 in September. The median forecast in a Bloomberg survey was for an addition of 185,000.

“It’s a very big turnaround from what happened in September to October,” said Evan Lucas, a market strategist at IG Ltd. in Melbourne. “Does that mean December is on? Well, the market has certainly moved to that number.”

As recently as mid-October, traders held a net bullish position in Treasuries. Since then, the Federal Reserve’s Oct. 28 statement said policy makers would reassess the benchmark rate at its “next meeting.”

Fed Chair Janet Yellen reinforced speculation for December liftoff on Nov. 4, calling it a “live possibility.” She speaks again this week, along with New York Fed President William C. Dudley, Chicago Fed President Charles Evans and Richmond Fed President Jeffrey Lacker.

“Most should sing from the same songbook, cementing expectations for a December hike,” said Imre Speizer, a senior market strategist at Westpac Banking Corp. in Auckland.

(An earlier version of this story corrected the headline to show that Treasury shorts rose by the most since 2013, not to the highest since that date.)

–With assistance from Rishaad Salamat and Anchalee Worrachate in London and Susanne Walker Barton in New York.

To contact the reporters on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net; Alexandra Scaggs in New York at ascaggs@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Michael Aneiro