Here’s what a hedge fund trader says that happened in Thursday’s bond market tantrum, which sent the 10-year Treasury yield to 1.60%.


A whirlwind of selling tore through bond markets on Thursday.

Even for an investment veteran like Gang Hu, the forced dismantling of popular trades in the Treasury market in the middle of the week was one of the most violent of his career.

“What happened on Thursday was a total drought of risk appetite in the fixed income space,” Hu, a managing partner and founder of hedge fund Winshore Capital Partners, said in an interview, adding that he had been on the sidelines. since last week. when the liquidation in the Treasury markets gained strength.

Hu had previously served as head of inflation operations at bond fund giant Pacific Investment Management, or Pimco, and his career has included stints as a trader at BlueCrest Capital Management and a market maker at Credit Suisse.

Their experience suggested that once bond market sales, such as the one experienced last week, got underway, assessments of the appropriate interest rate based on economic and inflation forecasts did not matter where yields were heading in. the short term.

“I told a co-worker, ‘We have announced the end of the liquidation for the seventh time, maybe it’s time to stop calling him,'” Hu recalled.

Still, Hu says valid concerns about a surge in inflation and an eventual Federal Reserve tightening contributed to the Treasury sell-off throughout this week. But Thursday’s move, at least, was also the result of market participants pulling back trying to cut their positions to avoid being caught up in more rapid market moves.

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The sharp rise in Treasury yields sparked a selloff in the stock market on Thursday, hitting tech and other high-yielding stocks harder, prompting the Nasdaq Composite COMP,
+ 0.56%
to its biggest loss since October. The Nasdaq rebounded modestly on Friday as yields fell, while the Dow Jones Industrial Average DJIA,
-1.50%
it fell almost 470 points, or 1.5%. The main benchmarks ended the week lower.

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Part of the problem in the bond market was that market measures of inflation expectations could not continue to rise if early-dated Treasury yields were sluggish, anchored by the Fed’s accommodative stance.

But traders were concerned that, should price pressures rise as much as feared, the Fed would have to adjust policy more quickly than it had planned, which would then curb inflation.

Those fears helped drive rates up in the short term, contributing to losses in popular strategies designed to benefit from increased price pressures. Soon after, market participants unwound crowded trades like yield curve steeps, as traders buy short-term Treasuries and sell their long-term peers to bet on a wider yield margin between the two maturities. .

Finally, evaporation from buyers and the rush of new supplies on Thursday led to the worst performance on the 7-year Treasury note TMUBMUSD07Y.
1.126%
the history of the auction since its reintroduction in 2009, the trigger for the TMUBMUSD10Y 10-year Treasury yield,
1,415%
brief increase to 1.60%. The benchmark maturity rate fell to 1.46% on Friday.

Primary traders who stayed behind to take over the unsold bonds, one of their responsibilities in exchange for the privilege of dealing directly with the Fed, may have needed to temporarily increase yields to ditch the bonds at the end of the day, Hu said.

“I suspect that each operation was a risk reduction operation on Thursday. Then the Treasury needed to issue that many bonds, but buyers weren’t in the mood to deal with it. One time [the auction] afterward, there was sheer panic on the part of the traders, ”Hu said, referring to how bond market traders describe a poor result in a Treasury auction.

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