Mutual funds’ interest in Treasury futures has surged in recent months, with asset managers’ net long positions hitting historical highs. This trend is driven by several factors, including increased demand for Treasury exposures in a higher interest rate environment and a preference among mutual funds to use futures rather than securities to source these exposures. Treasury futures offer a more widely utilized avenue for leverage compared to repo borrowing, contributing to mutual funds’ attraction to this instrument.
Analyzing mutual fund portfolio holdings reports on SEC Form N-PORT reveals a notable uptick in mutual funds’ futures holdings since 2020. This growth can be attributed to both heightened demand for Treasury exposures and the preference for futures over securities. When comparing mutual funds utilizing Treasury futures with those primarily investing in Treasury securities, a distinct characteristic emerges: funds utilizing futures tend to engage in greater risk-taking activities. This suggests that mutual funds leverage futures to amplify exposure to riskier assets. Additionally, these funds tend to hold higher cash reserves, experience more volatile investor flows, and have higher expense ratios.
Examining the time-series of asset managers’ Treasury futures positions sheds further light on this trend. Asset managers’ net positions in Treasury futures, particularly for shorter tenors like 2-, 5-, and 10-year notes, have surged to record highs. This increase is closely correlated with changes in corresponding Treasury yields, indicating a response to the higher interest rate environment. Notably, mutual funds account for the majority of the increase in shorter tenor benchmarks, while other asset managers drive the growth in longer tenors.
Overall, the rise in mutual funds’ interest in Treasury futures reflects a strategic shift towards leveraging futures to capitalize on Treasury exposures, particularly in response to evolving market conditions and interest rate dynamics.
