A good part of hedge funds maintain the reflation trade and remain short of bonds

By Maiya Keidan

July 21 (.) – Some hedge funds are keeping their bets against Treasuries, even after a sharp rally in US government bonds hit bear investors earlier this week.

The leveraged funds were clearly short on several long-term Treasuries maturities in the futures markets, the latest data from the Commodity Futures Trading Commission showed last week.

This made them potentially vulnerable to the bond rally as some market participants exited the so-called reflation operation on concerns that US growth would slow in the second half of the year.

New data to be released on Friday could provide a more complete picture of the extent to which rising Treasury prices, which move inversely to yields, rocked bearish investors. Benchmark 10-year Treasury yields were around 1.29% late on Wednesday, recovering from a low of just under 1.13 reached earlier this week. At the beginning of the year they peaked at more than 1.77%.

However, some hedge fund managers believe there is more room available for the reflation operation, which saw investors pile on the bearish bets of the Treasury and stocks of companies that would benefit from a strong rebound in US growth.

Among the factors driving the bearish view on Treasuries are forecasts of persistent inflation, skepticism that the Delta variant of COVID-19 will have a significant impact on growth, and expectations that the Federal Reserve will start to Check out their easy money policies ahead of schedule.

“The consensus is that current levels of return are too low for the level of inflation we have … and it does not appear that hedge funds have exhausted their positions,” said Troy Gayeski, partner and co-chief investment officer at SkyBridge Capital, a fund. of hedge funds with $ 7.5 billion under management.

Hugo Rogers, who oversees $ 1 billion of discretionary and multi-asset portfolios and a long-term hedge fund as chief investment officer for Deltec Bank and Trust, enjoyed big returns on his bearish Treasury bets when yields rose earlier this year. anus.

However, more recently, the reflation business “has been a bad place to be,” he said.

Still, Rogers is keeping his bets bearish, as he expects the 10-year Treasury yield to top 2% as inflation persists for longer than markets appear to be calculating.

“We don’t think the Delta variant or tapering is enough to derail growth or inflation,” he said.

A London-based hedge fund manager told . that a short position in US Treasuries had cost the company about 60 basis points, but his fundamental view remained that yields would end up higher. by the end of the year.

“The reflation operation is far from over,” the manager said, adding that an expected increase in US debt issuance in October could push yields up.

“I think the regime change narrative is still valid,” said Robert Sears, chief investment officer at Capital Generation Partners.

“Next year, we would expect rates to rise in what appears to be a positive environment for growth, and I think that is the rationale for most managers.”

Others refrain from commenting on the direction of the Treasury bonds.

Edouard de Langlade, chief investment officer at Swiss macroeconomic hedge fund firm EDL Capital, has avoided bond markets, believing the Fed will remain dovish for longer than anticipated.

“Right now, you just can’t go long in the fixed income market as there is no value, and going short has been a very painful trade recently, so we are staying on the sidelines.” (Information from Maiya Keidan; additional information from Ira Iosebashvili; edited by Richard Chang) .. Translate serenitymarkets

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