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(Bloomberg) -- Hedge fund interest in a popular trading strategy that’s meant to profit from price gaps between cash Treasuries and futures appears to be fading, according to Deutsche Bank AG.
Leveraged fund short positions in Treasury 2-year, 5-year and 10-year contracts have declined somewhat in recent weeks “suggesting a potential reduction in the Treasury basis” and relative value positions, Deutsche Bank strategists including Steven Zeng said in a note highlighting the latest positioning data released from the Commodity Futures Trading Commission.
The observation follows wider-coverage of the leveraged risk behind the trade seen since the start of the year as Washington looks to force through a rigorous overhaul of the bond market. The process looks to include all repurchase agreement transactions — a key element to provide leverage in the basis trade.
The CFTC data released Friday shows that between Feb. 6 and Feb. 20, leveraged funds, which are typically hedge funds and various types of money managers, unwound their net short position in Treasury futures by around 500,000 10-year note equivalents. In the cash market, that equates to approximately $30 million per basis point move in risk terms.
Read more: Hedge Funds Continue to Cover Treasury Shorts in Futures: CFTC
Hedge funds are still massively positioned net short according to CFTC data up to Feb. 20, which showed an equivalent 10-year note futures position of roughly short 6.7 million contracts, compared to a peak short of approximately 7.2 million seen in January.
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