A sell-off broke the bond markets on Thursday.
Even for an investment veteran like Gang Hu, the forced conduct of popular mid-week trades on the Treasurys market was among the most violent in his career.
“What happened on Thursday was a complete drying up of risk appetite in the fixed income space,” Hu, managing partner and founder of hedge fund Winshore Capital Partners, said in an interview, adding that he was on the sidelines. last week when the sale on the Treasury markets gained steam.
Hu previously served as head of inflation transactions at the bond fund giant Pacific Investment Management, or Pimco, and his career included periods as a trader at BlueCrest Capital Management and a market maker at Credit Suisse.
His experience has suggested that once bond market sales, such as last week, have started to run, estimates of the corresponding interest rate based on economic forecasts and inflation have not mattered where short-term returns are heading.
“I told a colleague of mine, ‘I called the end of the sale for the seventh time, maybe it’s time to stop calling,'” Hu recalls.
However, Hu says valid concerns about rising inflation and a possible tightening of the Federal Reserve have contributed to the massive sale of the Treasury this week. But Thursday’s move, at least, was also the result of the downgrade of market participants who tried to reduce their positions to avoid being caught by other rapid market movements.
See: The analyst claims that the current sale of the bond market is more serious than “tantic tantrum”
The sharp rise in Treasury yields triggered a stock sell-off on Thursday, hitting technology and other high-value stocks hardest, sending Nasdaq Composite COMP,
until the steepest loss in October. The Nasdaq returned modestly on Friday as yields retreated, while the Dow Jones Industrial Average DJIA
fell by almost 470 points, or 1.5%. Major milestones ended the week lower.
Read: The cracks in this multi-decade relationship between stocks and bonds could affect Wall Street
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Part of the problem in the bond market was that market measures of inflation expectations could not keep trucking higher if the Treasury’s anticipated yields were inactive, anchored by the Fed’s accommodative position.
But traders worried that if price pressures increased as much as they feared, the Fed would tighten policy sooner than planned, which would then reduce inflation.
These fears have contributed to rising short-term rates, contributing to losses in popular strategies aimed at taking advantage of rising price pressures. In the short term, market participants conducted crowded transactions, such as yield curve dampers, when traders simultaneously buy short-lived treasury and sell their long-standing colleagues to bet on a higher yield between the two maturities.
Finally, the evaporation of buyers and a lot of new offers led on Thursday to the worst display in the 7-year treasury note TMUBMUSD07Y,
the history of the auction since its reintroduction in 2009, the TMUBMUSD10Y trigger of the 10-year Treasury yield,
short increase to 1.60%. The reference maturity rate returned to 1.46% on Friday.
The main dealers who remained to take over unsold bonds, one of their responsibilities in exchange for the privilege of trading directly with the Fed, should have temporarily pushed higher yields to get rid of bonds by the end of the day, Hu said.
“I suspect that each transaction was a risk reduction transaction on Thursday. Then, the Treasury had to issue so many bonds, but the buyers did not feel like taking care of it. Once [the auction] with the queue, then there was only pure panic from dealers, “Hu said, referring to how bond market traders describe a poor result in a treasury auction.