OPINION: Bears are amassing huge short bets, confident that the US share market will tumble as financial conditions tighten thanks to a surge in US government borrowing.
Hedge funds have amassed a huge bet that the investor euphoria over last week’s deal toP 500 has climbed 19 per cent from the lows set last October – putting it within a whisker of the 20 per cent rise that marks a bull market – hedge funds and other speculative investors are sitting on the most bearish positions since 2007.
But the US debt ceiling deal means that this whole process will go into reverse. The US Treasury now needs to rebuild its cash balances, and markets are bracing for it to soon start selling more than $US1 trillion in new short-term bonds. This process – known as quantitative tightening, or QT – involves the Fed allowing $US60 billion of US government bonds and $US35 billion of mortgage bonds to mature without using the proceeds to buy new bonds.So far, the Fed’s progress in shrinking its balance sheet has been slow. The Fed’s balance sheet has fallen to $US8.4 trillion, from a peak of $US9 trillion a year ago.
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