With a record pile-up of shorts stalking the benchmark 10Y US Treasury…

… institutional funds who have been patiently betting against low yields in the United States and Europe are about to enjoy a big payday, as rates continue to rise across the globe and inflation finally picks up as the Phillips curve stirs from its decade-long coma.

Money managers like Goldman Sachs, Franklin Templeton, and Aviva Investors are all part of a group of brand name investors who recently doubled down on short positions on long-dated government debt. According to JPMorgan data, the largest 20 Euro mutual funds will also profit from the move as most of them shifted aggressively to short duration stances last month, suggesting they are in a good position for the “perfect storm” that has hit rates markets in recent days. 

Bonds are falling as a result of “strong” macroeconomic data in the US, continued “hawkish” sentiment from the Federal Reserve and strong commodity prices. At the same time, German bund prices have dropped precipitously in sympathy, and also as a result of receding fears over Italy’s fiscal policy and the country’s corresponding economic trajectory (at least for now, that is as the Italian turmoil is far from over).

As such, all those who have been betting for some type of “normalization” in the bond market may receive their validation soon. James McAlevey, portfolio manager of the Aviva Investors Multi-Strategy Fixed Income Fund, told Bloomberg:

“We have a structural short duration position in the U.S. because we expect the Federal Reserve will continue normalizing policy and that inflation will increase as jobs growth and wage pressure builds. Market participants are at a point where they can start to have a conversation about shorting the European bond market.”

In anticipation of the move, Goldman went underweight European rates in its $3.4 billion strategic income fund over the summer. That added to the fund’s already negative duration stance and was catalyzed by the expectation that the ECB would start raising interest rates, following in the footsteps of the United States.