Data from Goldman Sachs Group’s prime brokerage unit reveals that hedge funds are intensifying their bets against U.S. stocks as the S&P 500 experiences its worst losing streak since the collapse of Silicon Valley Bank.
Persistent Increase in Short Positions
For the third consecutive week, Goldman’s hedge fund clients have been augmenting their short positions in individual stocks, exchange-traded funds (ETFs), and equity index products. This marks the fifth time in the past six weeks that hedge funds have increased their short positions, with a significant focus on single-name stocks. Shorting entails borrowing shares from a broker like Goldman Sachs and selling them, with the aim of repurchasing them later at a lower price to close the position.
Short-to-Long Position Ratio Approaching Historic Low
The surge in short bets has resulted in the short-to-long position ratio among Goldman’s prime-brokerage clients approaching levels not seen since last fall when the S&P 500 recorded its 52-week closing low of 3,577.03 on October 12. If this ratio continues to decline, it could reach its lowest point in five years. There are suggestions that such heavily bearish positioning by hedge funds may serve as a counter-indicator, potentially coinciding with a market turnaround.
Factors Contributing to Increased Bearishness
One Goldman analyst attributes hedge funds’ growing negativity to the recent rise in long-term Treasury yields compared to short-dated yields. The yield on the 10-year Treasury note (BX:TMUBMUSD10Y) climbed over 9 basis points in early trade on Monday, surpassing 4.52%, while the 2-year yield (BX:TMUBMUSD02Y) rose by 3 basis points to 5.127%, after the spread between the two widened by approximately 2.4 basis points last week, as reported by Dow Jones Market Data.
Bear Steepening and the Treasury Yield Curve
Bond yields have a unique relationship with prices, referred to as “bear steepening” on Wall Street. This term is used to describe the widening difference between yields on short-dated and long-dated bonds as the bond market experiences a decline.
For over a year, the Treasury yield curve has been inverted due to the Federal Reserve’s aggressive campaign of interest-rate hikes, unmatched since the 1980s. However, analysts in the bond market are concerned that this curve may soon “un-invert” as traders begin to sell off long-dated bonds. Such a development could potentially create additional challenges for stocks.
According to a note from a Goldman sales trader, it appears that the long-short community particularly opposes this bear steepening of the yield curve.
Following the Federal Reserve’s announcement of its intentions to maintain interest rates above 5% through 2024, Treasury yields have been steadily rising. It is expected that the central bank will deliver one more interest-rate hike later this year.
Since March 2022, the Federal Reserve has steadily increased rates, shifting its policy rate target from zero. Over the course of these changes, borrowing costs have been raised 11 times, resulting in a current policy rate range between 5.25% and 5.5%.
Last week saw an impactful drop in the S&P 500, with a decline of 2.9%. This decrease marked the largest since the week ending on March 10, when stocks were negatively impacted by Silicon Valley Bank’s collapse. As trading began early Monday, U.S. stocks experienced a lower start.
Conclusion
The bond market is currently witnessing bear steepening as the Treasury yield curve widens. With the potential “un-inverting” of this curve on the horizon, analysts and traders are closely monitoring the impact on stocks. As Treasury yields continue to rise following the Federal Reserve’s recent announcement, it remains uncertain how this will affect the overall market. The S&P 500’s significant drop last week serves as a reminder of the volatility currently present in the financial landscape.
