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Hedge funds go hog wild on government bonds

As many market participants focused on the increased changes for a long-delayed interest rate hike, hedge fund managers loaded up on government debt.

As a whole, the industry bought 10-year Treasury notes at the fastest clip in more than five years, going long on the benchmark fixed income instrument despite expectations for monetary tightening at the Federal Reserve, according to Bank of America Merrill Lynch data.

The move to the 10-year, the strongest since August 2010, also came as hedge fund managers increased bets that the stock market would move higher.

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Stocks catapulted higher in October after a bruising third quarter, with the rising about 9 percent. The market gains coincided with an industrywide rise of 1.7 percent for hedge funds during the month, bringing the year-to-date returns into slightly positive territory, according to industry tracker HFR. (The latest numbers from BofAML are a bit different, putting the industry up 1.1 percent for the quarter but down about 2 percent year to date.)

Most curious, though, was the move to government bonds, considering the October Federal Open Market Committee meeting produced a statement the market widely considered to be hawkish for rates ahead.

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Wall Street has been watching Fed language all year to determine when the first rate hike in more than nine years will happen. The October meeting marked a swing in expectations, with traders now pricing in a 72 percent chance that the FOMC will move at the Dec. 15-16 meeting. Prior to the meeting, sentiment had been for a March 2016 hike at the earliest.

The 10-year yield popped higher along with the market, rising from 1.98 percent around the time of the mid-month FOMC session to close October at 2.14 percent. Yields have continued to climb, with the latest reading around 2.28 percent in Wednesday trading. Rising yields equate with falling prices, indicating capital losses for holders of government debt.

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In addition to jumping into the 10-year trade, hedge fund managers cut short positions in the 30-year bond and two-year note, according to BofAML.

Equity market neutral has been the most successful strategy this year, rising 5.3 percent. Those funds now sit at 8 percent net long, the highest since August but lower than the late-July peak.