Hedge Funds are short U.S. and U.K. fixed income

Citi Research released its bi-monthly report of how different investors are positioned across regions within the fixed income space. Most investor types have a short position in U.S. markets. This may be due to investors trying to cover short positions in longer maturities, but it also seems to point to lower upside data surprises for bonds. Citi analysts believe that demand for U.S. Treasuries is not yield dependent. The yield increase registered since October of last year has not been enough to lure U.S. Treasury buyers. Furthermore, investors believe that taking duration risk in U.S. bonds will not pay off as they foresee continued interest rate increases that would pose downside to longer dated issues.It appears at least from the recent month, that investors especially hedge funds were positioned poorly.

Imbalance in positioning in the us Europe  hedge funds

US treasuries europe

Similarly, for the U.K. investors are also positioned short, though the emphasis is not as strong as U.S. short positions. For both U.S. and U.K. markets, short positions are primarily held by hedge funds and peripheral real money.

UK shorts across all different investor types europe

Seeking yield with higher risk appetite for peripheral Europe bonds

Citi analysts note that investors are seeking yield in peripheral European bonds, as they see yield spreads tightening this year. The demand for core European bonds is on a downside tick as investors see less upside in this category relative to the peripheral bonds. In particular, investors are long in Italy and Spain, and to a lesser extent Ireland. The improving economic outlook and recent upgrade in Ireland is not yet fully priced in the market.

strong demand for the relatively high yields europe

positioning in italy

positioning in spain

positioning in ireland

Intermediate bonds favored in Japan

According to Citi analysts, investors see the most value in Japan’s intermediate part of the yield curve (7-12 year bonds). Overall, hedge funds and Japanese investors hold the long positions while the rest of investors are either neutral or short. Citi’s Japanese team notes that bonds in the 15 year range may be less expensive relative to bonds in the 10-12 year range.

net dv01 of flow

In Japan domestic and hedge funds are long