Asset managers extended their massive liquidation of interest rate futures holdings for the seven days up to Tuesday, according to data released on Friday by the US Commodity Futures Trading Commission.
Positioning by investors across the actively traded US interest rate futures market has been extremely volatile in the past two weeks as asset managers and speculative traders have reacted to concerns over the economy and the shock departure of Bill Gross from Pimco.
For the second straight week, CFTC data showed asset managers cut their long positions in eurodollar futures by over 800,000 contracts, representing the liquidation of hundreds of billions of dollars of positions in interest rate derivatives.
Under Mr Gross, Pimco's Total Return Fund was a large investor in three-month "eurodollar" interest rate contracts on the Chicago Mercantile Exchange. The futures, which enable buyers to lock in a rate for three months during the next 10 years, are highly liquid and the most actively traded contract on the CME.
After data last week disclosed that asset managers reduced their long eurodollar futures positions by 868,853 contracts in the week to September 30 - the largest one-week change on record - the latest data for the week up to Tuesday revealed a further drop of 822,266 contracts.
So-called "longs" in eurodollar contracts reflect the view that the Federal Reserve will raise interest rates at a slower pace than market participants currently expect. Mr Gross and other asset managers were major buyers of such futures contracts because of their belief in a "new neutral", whereby US growth remains slow and rate hikes are modest.
But massive redemptions at Pimco, with $23.5bn leaving the Total Return Fund alone during September, has sparked a major drop in derivative holdings like futures, which can be easily liquidated as they are transacted on an exchange.
Such liquidation has been helped by speculative traders cutting their opposing bets, trades that are geared towards the Fed raising rates at a pace faster than the current consensus over the next few years. That trend accelerated on Wednesday after the central bank's meeting minutes for September disclosed concerns among policy makers that the strong dollar and slowing global growth may hurt the US economy.
Ira Jersey, strategist at Credit Suisse, said the selling of interest rate contracts by asset managers may well reflect them cashing in their profits as underlying interest rates have dropped in recent days.
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