Deflation trading caught several big-name hedge funds off guard


Investors are reassessing their beliefs about the reinflation deals that attracted Wall Street this year. Hawks The Fed caused some fund managers to suffer losses.

Earlier this year, shorting the prices of US government bonds was successful, and as the pace of economic recovery accelerated, hedge funds and other investors made considerable gains. But the recent volatility and the specter of the Fed’s policy turn have cast serious doubts about whether investors should continue trading.

Neuberger Berman’s Deputy Chief Investment Officer for Fixed Income Thanos Bardas said: “It’s clear that the reinflation transaction has been flushed out.” “The market has overreacted. [but] Uncertainty has increased. “

Several big-name hedge funds are caught in the whirlpool, including Andrew Law’s Caxton Associates and Chris Rokos’ Rokos Capital.

The reason for the reinflation transaction is focused on the expectation that the United States will accelerate the vaccination plan and cancel the Covid-19 lockdown measures to usher in a period of high growth and inflation, as business activities begin to normalize.

The Fed insists that before adjusting its ultra-loose monetary policy, it will not consider rapidly rising US consumer prices and then adjust its ultra-loose monetary policy, which further encourages investors to take a stance on long-term Treasury bonds. Long-term debt is often disproportionately affected by inflation because it erodes the value of investors, and these interest payments are “fixed” for many years.

Hedge funds have poured into this transaction, betting that it will be their next big winner after gaining last year’s rise in U.S. Treasury prices. Caxton is one of the best performing hedge funds in 2020. He wrote in December that “re-inflation is likely to occur”. Some funds bet on bonds, while others open positions against the U.S. dollar.

Taken in recent months Glow In this transaction, despite the greater-than-expected increase in consumer prices, the repurchase of 10-year US Treasury bonds resulted in yields well below the recent highs set in March 2021. But it was the June meeting of the US Central Bank Governors and new signals that the Fed may not tolerate higher inflation as expected under the new policy framework announced in August last year, causing the worst hit so far.

After the initial sharp sell-off after the meeting-which opened the door for two interest rate hikes in 2023-US government bond prices have soared as investors are struggling to interpret the Fed’s slightly less benign tone. The price increase pushed the benchmark 10-year bond yield from a high of nearly 1.8% in March to 1.35% this month. Since then, it has remained stable at around 1.50%.

Yields on two-year Treasury bonds, which are more sensitive to monetary policy adjustments, rose, rising 0.11 percentage points to 0.26% since the beginning of this month. This resulted in a rapid flattening of the yield curve that tracks the difference between long-term and short-term Treasury yields.

“What happened somewhat reinterpreted the Fed’s [framework] It really means,” said Michael De Pass, Citadel’s global head of US government bond trading. “The argument to’make it hot’ may not be as obvious as market participants expected. “

2-year Treasury bond line chart (%) shows that the Fed’s policy change signal pushes up short-term yields

He added: “Yes [reflation trade] Has sunken. “

Price volatility has been amplified to a certain extent by the positioning of funds before the Fed meeting. According to data from the US Commodity Futures Trading Commission, the so-called “steep” bet is that the price of longer-term Treasury bonds, which are particularly crowded before the Fed meeting, falls faster than short-term Treasury bonds make profits.

Those who have seen these figures said that Caxton’s $2 billion macro fund has fallen by about 8%, and the fund is still rising this year.

Brevan Howard lost approximately 1.5% in major funds in June and 2.9% in funds managed by trader Alfredo Saitta. According to people familiar with the matter, Rokos has fallen about 4% this month. Rokos and Brevan declined to comment, while Caxton did not respond to a request for comment.

Although some managers have been burnt due to the reversal of inflationary trading, others have remained strong, using recent “position flushing”—as one trader put it—as buying opportunities.

“In our opinion, nothing has changed. We are all focusing on reinflation trading,” said Bob Michel, chief investment officer of JPMorgan Asset Management, who noted that his team has increased their bets in recent days. . “We believe that there is a lot of growth and inflationary pressure in the economy… [and] Our reopening at home is only halfway through. “

Dan Ivascyn, chief investment officer of Pimco Group, also believes that in view of the “upward” inflation risk, long-term government bond yields may rise from here. But he warned that the road ahead may be bumpy.

“You are in a time when valuations are more tense,[and]Ivascyn said: “It takes less bad news to create the same level of volatility.” “You want to keep checking your thoughts.”

Trade secrets

The British “Financial Times” revised “Trade Secrets”, a must-read daily newsletter on the changing face of international trade and globalization.

Register here Learn which countries, companies, and technologies are shaping the new global economy.

Leave a Reply

Your email address will not be published. Required fields are marked *