Are hedge funds throwing in towel on Eurodollar shorts?

June 23, 2014 07:46 AM
Hedge funds have pared bank on their net-short Eurodollar position over the last two weeks. Having consistently built up short positions for 8 weeks in a row coming into the week of June 10th, leveraged funds pared back their outright shorts from 2.067m to 2.001m in the latest report covering the week ending June 17. Net-short leveraged fund position declined 139k over the last two reporting periods.
Looking at the more broad based CFTC ‘non-commercial’ data, these oft called ‘large spec’ accounts reduced their net-short (fut&opt) position by 235K over the last two weeks. This is the largest net-short reduction since April 2013 and the largest percentage shift away from net-short since September 2013.
There had been a fairly straight-line pace of accumulating net short positions of by ‘non-commercial’ accounts since early June 2013. Average increases to net-short positions had been roughly 30,000 per week. This trend appears to have been broken over the last two weeks. Over the last two weeks some striking developments occurred; the Federal Reserve FOMC meeting, the seminal ECB meeting, the beginning of heightening geopolitical shift in Iraq and continued unrest in Ukraine provided headline news.
One or more of the above or something entirely different may have convinced hedge funds to pare back their exposure to short positions in the front end of the U.S. curve. There has however been relatively little price movement in Eurodollar futures (see chart EDM6) over the last weeks. They are flat over the last week and slightly lower over the last month. Contrast this to the somewhat flat price action in Euribor over the last week, but slightly higher prices over the last month.
We have advised that some accounts appear to have been long Euribor v. short Eurodollars. It may be that these accounts have found reason to take profit on long positions in Euribor as suggested may happen just before or just after the ECB meeting. Contracts such as June ‘16 Euribor are trading at little over 30 basis points, giving hf’s little incentive to hold onto longs from this point.
Additionally it is believed that some of these accounts have been long further out the curve against Eurodollar short positions. For guide, the Treasury 5-30 yield curve has flattened over the last month from 190 to 166 the day after the last CFTC report on Tuesday. Some hedge funds may have felt that spread was stretched and removed some of their curve flattening positions.
CFTC Commitment of Trader data indicate that net long U.S. Bond (future & option) positions held by ‘non-commercial’ accounts were reduced by 47,000 in the two weeks ending June 10, the largest reduction in net-longs since December 2012.
It may be that hedge funds are throwing in the towel on Eurodollar short positions for reason of non-performance, conceding that the record net-short position built was a mistake. However, it may also be worthwhile to consider that some funds have found good reason to take profit on winning ‘offsetting’ positioning. Both the U.S. long end and the European short end have outpaced the Eurodollars advance and it is only prudent for rightly positioned accounts to book some profit on winning positions.
About the Author

Martin McGuire, managing director at TJM Institutional Services