Government-bond swing burns Wall Street investors

Behind the losses are recent sudden moves in government-bond prices. Short-term bond prices have tumbled to touch their highest level since March 2020, with central banks indicating plans to end their extravagant stimulus measures, sending yields – which are at a time of falling prices grow.

At the same time, yields on longer-term bonds, which fall when investors expect slower growth, have retreated from their highs for the year. The gap between the two narrowed sharply, a phenomenon known as a flattening of the yield curve. This upsets the popular bet that a gradual return to normal levels of growth and inflation will push interest rates higher in the coming years.

Steve Kane, who helped run TCW Group Inc.’s $86 billion MetWest Total Return bond fund, said hedge funds and others that make big bond bets were “caught offside” by recent price moves. “They’re being squeezed,” he said.

The Bloomberg Treasury Index has lost about 1.5% since early August.

While the percentages are small relative to recent swings in stocks like bitcoin or Avis Budget Group Inc., many hedge funds and others borrow large amounts of money to increase their bond bets, so the wrong trades can be painful. For example, London-based Rocos Capital, run by investor Chris Rokos, has lost 27% in 2021 as of the end of October from bond trades, according to people close to the matter. The fund is on track for its worst year ever.

According to people familiar with the trade, multistrategy hedge funds including ExodusPoint Capital Management LP and Balyasni Asset Management LP also lost money from recent government-bond moves.

For months, investors had been preparing for the Federal Reserve to reduce its role in the economy by reducing its bond-buying stimulus program, which is now set to expire in June. Investors also anticipated a gradual move by the Fed to raise interest rates over the next few years, while becoming more concerned about rising inflation. As a result, many said short-term Treasuries would do better than 10- and 30-year bonds — which typically suffer the most when longer-term inflation rises — while tightening the yield curve.

Instead, the opposite is happening, as long-term bond prices climb, flattening the curve. The same flattening is happening in the British, Australian, Canadian and other government bond markets. Such moves usually occur at the end of the interest rate cycle, as investors anticipate the end of interest rate hikes by monetary authorities, not as investors prepare for the onset of rate hikes.

The recent moves underscore how challenging it has been for bond investors to anticipate inflation, central-bank policy and the resulting market moves after an era of unprecedented stimulus to escape the economic crisis. Traders say some of the recent moves are being acted upon by large investors to close, or exit from existing positions to reduce their losses.

While inflation concerns have stirred the markets for months, recent price action suggests the bond market is now preparing to moderate inflation over the next few years, with the Fed in tension with the idea that supply- Lowering the chain constraints will soon slow the rise in consumer prices.

Traders say bond prices now suggest inflation to be 3% over the next five years, up from 2.5% a month ago. Investors are anticipating a series of interest rate hikes over the next few years, which will depress the economy and ultimately drive inflation, explaining why longer-term bonds are doing better than short-term bonds. Bond prices indicate that the Fed will raise interest rates five-fold by the end of 2023, resulting in a slowdown in the global economy.

Investors in stocks and riskier bonds show less concern about the outlook for the global economy. Stocks have been rising in recent weeks, with the Dow Jones Industrial Average closing above 36,000 for the first time, while junk-bond prices have also been climbing.

Long-term yields fell again at the end of the week after better-than-expected US jobs reports and a surprise decision by the Bank of England to keep rates steady. On Friday, the 10-year yield fell to its lowest level in six weeks.

“Confidence in the rate path has dropped significantly. Global growth expectations have been pushed forward in the most informal of ways, and many people are trying to wait on the edge,” said Gennady Goldberg, US rates strategist at TD Securities in New York. to find out what their next step should be.”

Many investors have been losing money in the bond market lately, but few are more surprising than Mr. Rokos, who has also suffered from some sour Chinese stock investments, according to people close to the matter. Mr. Rokos, co-founder of Braven Howard, started his own firm in 2015 and has a strong record. His fund grew 44% in 2020. He is so influential that other hedge funds sometimes copy his trades.

According to people familiar with the moves, Mr Rokos set up his bond trades in both the US and British bond markets using derivatives. One of the people said his recent belief has been that central banks in both places will raise interest rates gradually, rather than proceed as aggressively as the market now predicts.

As the economy recovers, supply chains normalize and central banks begin raising rates, investors expect more swings ahead.

“As we get closer to giving up on it completely” [quantitative easing] Governance, around the middle of next year, we would expect to see an increase in market volatility,” said Rick Ridder, asset manager chief investment officer of global fixed income at BlackRock. “This will be a healthy development and not be disruptive.”

This story has been published without modification to the text from a wire agency feed