Quantitative fund Catalyst Funds is shorting 5 to 10 year US Treasury bonds because the fund expects US interest rates to remain unchanged this year as inflation continues to rise.

According to the data, this fund with assets of more than 7 billion US dollars has returned close to 14% this year, more than 94% of its peers. Its five-year performance is in the top 10%.

The Catalyst/Millburn hedge strategy fund is selling US Treasury futures while buying short-term treasury notes and corporate bonds. These positions reflect the view that the market may have overestimated the possibility that the Federal Reserve will cut interest rates, while ignoring the pressure on long-term Treasury yields caused by America's growing deficit.

David Miller, chief investment officer of Catalyst Funds in New York, said: “The Federal Reserve will probably not be able to cut interest rates as they say.” “It's unclear how to lower interest rates without driving up inflation.”

Concerns about rising longer-term interest rates have caused sharp market shocks this year, causing 10-year US Treasury yields to soar by more than 90 basis points from February lows. Traders have been forced to cut interest rates by 25 basis points before the end of the year from betting on interest rate cuts of more than 150 basis points that began in March.

Earlier this month, bond traders seemed relieved when an indicator measuring America's potential inflation cooled for the first time in half a year in April. Federal Reserve Chairman Powell also reduced the need for further interest rate hikes and hinted that once there is data support, interest rates will be cut immediately.

However, this relief did not last long, and yields picked up slightly. On Tuesday, the 10-year US Treasury yield was 4.55%, just 19 basis points below this year's high. Minneapolis Federal Reserve Chairman Kashkari said on Tuesday that although the Federal Reserve's policy stance is restrictive, policymakers have not completely ruled out the possibility of further rate hikes.

Miller said that Catalyst's fund is buying US treasury bills and short-term corporate bonds, such as those sold by Apple and Microsoft, to take advantage of “the cutting edge of the curve” yield.

He said that the US government's lending program has also put pressure on bonds. Estimates released by the Congressional Budget Office in February show that by 2034, the budget deficit will increase from 1.58 trillion US dollars this year to 2.56 trillion US dollars.

Commenting on the impact of the widening US deficit, Miller said, “In the long run, this will indeed push up interest rates.”