GUNDLACH: Hedge funds are betting against Treasurys like never before, and they could soon face massive losses

Thomson Reuters

Jeffrey Gundlach

• Hedge funds are making record bets against long-term US Treasurys. 
• Jeff Gundlach, the founder of DoubleLine Funds, warned 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 warned on Friday via Twitter after data from the Commodity Futures Trading Commission showed hedge funds had piled on record bets against 10- and 30-year Treasurys.

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.   

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

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 will 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 are 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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