A whirlwind of sales separated bond markets on Thursday.
Even for an investment veteran like Gang Hu, the forced unfolding of popular trades in the Treasurys market was one of the most violent of his career.
“What happened on Thursday was a complete drying up of hunger for risk in the fixed income space,” Hu, managing partner and founder of hedge fund Winshore Capital Partners, said in an interview, adding that he was sitting on the sidelines since last week when sales in Treasury markets gained strength.
Hu previously held the position of head of inflation trading at bond fund giant Pacific Investment Management, or Pimco, and his career has included periods as a BlueCrest Capital Management trader and market maker at Credit Suisse.
His experience suggested that once bond market sales, such as the one experienced last week, developed, appropriate interest rate assessments based on economic and inflation forecasts did not matter. where short-term yields were headed.
“I told a co-worker of mine,‘ We called at the end of the sale for the seventh time, maybe it’s time to stop calling her, ’Hu recalled.
Still, Hu says valid concerns about rising inflation and a possible tightening by the Federal Reserve contributed to the massive liquidation of the Treasury later this week. But Thursday’s decision, at the very least, was also the result of the retreat of market participants who tried to reduce their positions to avoid being caught by other rapid market movements.
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The sharp rise in Treasury yields on Thursday led to stock sales, which hit technology and other high-flying stocks hardest, which sent the Nasdaq Composite COMP,
until the strongest loss since October. The Nasdaq bounced modestly on Friday as yields retreated, while the Dow Jones Industrial Average DJIA
fell about 470 points, or 1.5%. The main benchmarks ended the week lower.
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Part of the bond market’s problem was that market-based measures of inflation expectations could not keep the truck higher if previous Treasury yields were dormant, anchored by the Fed’s accommodative stance.
But traders worried that if price pressures increased as much as feared, the Fed would have to cut policy faster than it had anticipated, which would curb inflation.
These fears helped raise rates in the short term, which contributed to the loss of popular strategies designed to benefit from increased price pressure. Shortly afterwards, market participants carried out crowded operations such as an increase in the profit curve, when traders simultaneously buy short-term treasures and sell their long-time partners to bet on a wider profit differential between the two. maturities.
Finally, the evaporation of buyers and the rush of new supply led to the worst show of the seven-year Treasury note TMUBMUSD07Y,
history of the auction since its reintroduction in 2009, the trigger of the TMUBMUSD10Y of 10-year Treasury yield,
brief increase to 1.60%. The benchmark maturity rate retreated to 1.46% on Friday.
It is possible that primary dealers who stayed to take on unsold bonds, one of their responsibilities in exchange for the privilege of negotiating directly with the Fed, would have been needed to temporarily increase yields to get rid of bonds at the end of the day. , He said.
“I suspect that each operation was a risk reduction operation on Thursday. Back then, the Treasury needed to issue so many bonds, but buyers weren’t in the mood to deal with it. Once [the auction] Hu said, referring to how bond market traders describe a poor result in a Treasury auction.