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Investors are reaffirming their views on the reflective trade that has captivated Wall Street this year bend wrong The U.S. central bank has caused losses to some fund managers.
It won a bid against the price of U.S. bonds earlier this year as hedge funds and other investors made big profits as the economic recovery progressed. But the latest loopholes and the ghosts of the Federal Reserve’s policy axis have raised serious doubts as to whether investors should continue trading.
“It’s clear that the reflection trade has cleared,” said Thanos Bardas, Neuberger Berman’s deputy director of fixed income investment. “The market reacted too much, [but] uncertainty has increased. “
Numerous hedge fund funds were caught in the whirlwind, including Andrew Law’s Caxton Associates and Chris Rokos ’Rokos Capital.
The reason for the reflection trade revolved around expectations that the acceleration of the U.S. vaccination program and the removal of Covid-19 blockade measures would lead to a period of high growth and inflation as business activity began to normalize.
The Fed stressed that it would also overcome the rapid rise in U.S. consumer prices, which it considered temporary, before adjusting to its ultra-adaptive monetary policy, investing more against investors with a longer-term stance. Long-term debt tends to suffer from disproportionate inflation, as it erodes the value of interest payments that have been “fixed” for many years for investors.
Hedging funds piled up in the trade, betting that the next big win they managed to bring together U.S. Treasury prices last year. Caxton, among the well-hedged funds in 2020, wrote in December that “the scenario may be ready for excellent reflection.” Some funds are betting on bonds, while others are positioning against the dollar.
They’ve taken it in recent months shine them of this trade, yields with a 10-year increase in treasury purchases fell far short of the last highs recorded in March 2021, despite larger-than-expected jumps in consumer prices. But the US central bank meeting in June and the nascent signal that the Fed may not be as tolerant of higher inflation as expected in the new policy framework it introduced last August, which dealt the biggest blow so far.
After a sharp sell-off initially after the meeting (which opened the door to a rise in two interest rates in 2023) U.S. government bond prices were higher, with investors deciphering the Fed’s slightly lower tone. This price increase pushed the 10-year benchmark yield to as low as 1.35 percent this month, from a high of nearly 1.8 percent in March. Since then it has been about 1.50 percent.
The two-year note, which is more sensitive to monetary policy adjustments, changed higher as it rose 0.11 percentage points from the start of the month to 0.26 percent. This led to a blurring of the yield curve, which follows the gap between the long and short yields of the Treasury.
“What happened was a bit of a reinterpretation of the Fed [framework] it really means, “said Michael De Pass, head of US government bond trading at Citadel.” Leave the heat. “The narrative may not be as prominent as market participants anticipated.”
He added: “Trust [reflation trade] has been bitten “.
Price fluctuations increased to some extent as funds were allocated to the Faith meeting. According to the CFTC, bets that make profits when longer-running Treasury prices fall at a faster pace were mainly accumulated before the Fed meeting.
Caxton saw a decline of about 8 percent in the $ 2 billion Macro fund, which has seen it rise even more this year, according to those who have seen the numbers.
Brevan Howard lost about 1.5 percent in June in the main fund and 2.9 percent in a fund run by trader Alfredo Saitta. Rokos has lost about 4 percent this month, according to people familiar with his practice. Rokos and Brevan declined to comment, and Caxton did not respond to a request for comment.
While some managers are burning the reverse trade of reflection, others are holding firm, using the latest “positioning cleanup” – as one trader put it – as an option to buy.
“We don’t think anything has changed. We’re all in the reflection trade, ”said Bob Michele, JPMorgan Asset Management’s chief investment officer, noting that his team has added tougher stakes in recent days. [and] we are only halfway home. “
Dan Ivascyn, head of investments at the Pimco group, also believes that the yields of the former Treasury will increase from now on, given that the risk of inflation is “on the rise”. But he warned that the way forward could be uneven.
“You’re at a time when valuations are much longer,[and]it takes less bad news to create the same amount of volatility, “Ivascyn said.” You want to keep checking your thinking. “
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