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Hedge funds most bearish on treasurys in 16 months

U.S. Treasury Building
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U.S. Treasury Building

Hedge fund managers are the most bearish on 10-year U.S. Treasurys in 16 months, according to a new survey, as they position for a winding down of the Federal Reserve's bond buying program.

Of the managers polled, 48.3 percent were negative in their outlook for 10-year debt in July, up 6 percentage points from the previous month, according to a monthly survey by TrimTabs/BarclayHedge published late Wednesday. The survey, which was conducted July 16 and July 19, polled 95 fund managers.

(Read More: Gold bugs: Time for 'ugly duckling' to shine?)

Earlier this month, 10-year Treasury yields, which move in the opposite direction to prices, spiked to 2.73 percent - the highest since August 2011 - after the country's June employment report showed signs of solid improvement in the labor market, raising expectations for Fed tapering. Yields have since edged lower, currently trading around 2.58 percent.

The survey findings, however, contradict a recent Bank of America Merrill Lynch report that said hedge funds have been "aggressively" buying 10-year U.S. Treasurys in the week to July 22.

David Forrester, foreign exchange strategist at Macquarie, said it is possible that investors piled into the U.S. bonds last week in anticipation that Fed Chairman Ben Bernanke would be dovish in his testimony on July 17, after saying the U.S. needed a "highly accommodative" monetary policy a week earlier.

"However, the testimony was less dovish than expected, which could explain why hedge fund managers are bearish in their outlook for U.S. 10-year Treasurys," Forrester said.

Bullish on US Stocks

In contrast, investors were much more positive in their outlook for stocks. The majority, or 67.4 percent, of fund managers predict equities will be the best performing asset class in the U.S. over the next six months, outnumbering those who believe precious metals (7.4 percent), short-term bonds (15.8 percent) and long-term bonds (9.5 percent) will outperform.

On a global level, over 71.6 percent of managers think developed equity markets will be the best performers over the next six months, up from 70.8 percent last month. While, just 21.1 percent expect emerging markets to outperform.

Outlook for commodities

The survey found that managers are slightly more bullish on gold, with 35.8 percent expecting gold prices to rise over the next six months, compared with 32.3 percent in June.

Gold prices have staged a comeback in the recent weeks, rebounding almost 12 percent since late June, supported by assurance from the Fed that it would be flexible on the timing of the tapering of its $85 billion a month bond-buying program alongside strong physical demand.

(Read More: Watch out, US crude prices could correct 35%: Analyst)

Meantime, despite the recent rally in West Texas Intermediate (WTI) prices, 38.9 percent of managers expect prices to fall, while 35.8 percent forecast prices to stay flat.

Last Friday, WTI - the oil grade underpinning the U.S. crude futures benchmark - briefly traded at a premium over its North Sea Brent counterpart for the first time in three years; however, this has now reversed. WTI traded at about $105 a barrel in Asia on Thursday, while Brent was near $107.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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