A whirlwind of sales broke bond markets on Thursday.
Even for an investment veteran like Gang Hu, the forced settlement of popular trades in the Treasurys market mid-week was one of the most violent of his career.
“What happened on Thursday was a complete drying up of risk appetite in the fixed income industry,” said Hu, managing partner and founder of hedge fund Winshore Capital Partners, in an interview, adding that he had been on the sidelines since last week. seated. as the sell-off in the Treasury markets picked up steam.
Hu was formerly head of inflation trading at bond fund giant Pacific Investment Management, or Pimco, and his career has included a trader at BlueCrest Capital Management and a market maker at Credit Suisse.
His experience suggested that once bond market sales, like last week’s, started to roll, judgments of the appropriate interest rate based on economic and inflation forecasts didn’t matter for where short-term yields were headed.
“I said to a colleague of mine, ‘We’ve mentioned the end of the sale for the seventh time, maybe it’s time not to mention it again,’” Hu recalled.
Still, Hu says legitimate concerns about a rise in inflation and a possible Federal Reserve tightening have contributed to the massive sell-off of the treasury during this week. But at least Thursday’s move was also the result of retreating market participants trying to narrow their positions to avoid being caught by further rapid market movements.
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The surge in government bond yields led to a sell-off in the stock market on Thursday, which hit tech and other high-flying stocks the hardest, pushing the Nasdaq Composite COMP,
to the biggest loss since October. The Nasdaq bounced modestly on Friday as yields fell, while the Dow Jones Industrial Average DJIA,
fell nearly 470 points, or 1.5%. The main benchmarks ended the week lower.
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Part of the issue in the bond market was that market-based measures of inflation expectations could not keep freight traffic higher when government bond yields were dormant, anchored by the accommodative stance of the Fed.
But traders feared that in the event that price pressures rose as much as feared, the Fed would have to tighten policies faster than planned, curbing inflation.
Those fears helped drive short-term interest rates up, adding to losses in popular strategies designed to take advantage of strong price pressures. Soon after, market participants stopped crowded trades such as steeper yield curves, where traders simultaneously buy short-term Treasury bills and sell their long-term counterparts to bet on a wider interest rate spread between the two maturities.
Finally, the evaporation of buyers and a rush of new supply on Thursday led to the worst result in the 7-year treasury TMUBMUSD07Y,
the history of the auction since its reintroduction in 2009, the trigger for the TMUBMUSD10Y of the 10-year Treasury yield,
short increase to 1.60%. The benchmark maturity percentage retreated to 1.46% on Friday.
Primary dealers left over to take up the unsold bonds, one of their responsibilities in exchange for the privilege of dealing directly with the Fed, may have had to push up interest rates temporarily to get rid of the bonds by the end of the day, Hu said .
“I suspect that every trade on Thursday was a risk-reducing trade. Then the Treasury had to issue so many bonds, but buyers were not in the mood to deal with them. Once [the auction] followed, then there was pure panic from the dealers, ”said Hu, referring to how bond market traders describe a bad result in a Treasury auction.