Deleveraging in the Era of Large Asset Management: Ultra-Long U.S. Treasury Futures Hit by Seven Consecutive Days of Selling, Technical Selling Pressure Emerges

Asset managers are dumping long-duration U.S. Treasury futures contracts, a sign that passive selling is taking place as cash yields hover near multi-year highs. Money managers cut ultra-long bond futures long positions by about $27 million per basis point of exposure over the two weeks through Oct. 6, roughly equivalent to $38 billion of existing 10-year cash notes, according to data from the U.S. Commodity Futures Trading Commission. Prices of the futures contracts fell sharply over the same period as the 30-year yield rose to a 24-year peak of 5.68%. It's part of a months-long selloff fueled by concerns about the inflationary impact of the U.S.-Israeli war against Iran, deteriorating fiscal positions of governments around the world, and an artificial intelligence (AI) boom that is adding fuel to an economy the Federal Reserve is already trying to cool. The latest CFTC data released Friday also provided fresh evidence that technical factors are helping drive the recent decline in longer-end bonds. The data showed signs of passive selling by asset managers whose portfolio durations are being stretched by an underlying securities mechanism involving the cheapest-to-deliver bond. So-called "switch risk" dynamics are triggered when the basket of deliverable securities changes and the cheapest-to-deliver (CTD) security starts migrating toward longer-dated bonds. That can lead to passive selling. Open interest, or the additional risk exposure held by traders, also corroborates the deleveraging move in ultra-long bond futures. Open interest in ultra-long bonds has fallen for seven straight sessions, for a combined reduction of about $20 million per basis point of risk, the data showed. Rising yields over the same period also indicate long positions are being closed out.