A nightmare scenario was played out in the world s bond markets.
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A growing speculation that central banks will accelerate their plans to raise interest rates in the face of persistent inflation is why yields from Australia to the U.K. and the U.S. government bond yields went down against them last week. The losses fell up - and for a few became so big that the firms stopped some trading to contain the damage.
Balyasny Asset Management, BlueCrest Capital Management and ExodusPoint Capital Management each curtailed the betting of two to four traders after they hit maximum loss levels, according to people who asked not to be identified because the information is private. The risk- management move stoped traders from changing their positions, which makes it possible for firms to reassess trades or unwind them.
People said Exodus Point lost about $400 million last month, leaving it down 2% in October. The fund is still up 2.8% year-to- date.
Millennium Management is currently in touch with its macro portfolio managers and is continuing to monitor their trades, people said. The macro business of Point 72 Asset Management was said to see some losses from the bond- market moves.
The hitshows how some of the most advanced traders have been caught flat-footed by the quick shift in sentiment that has raced through markets. The losses will reduce the hedge funds' returns and they could be offset by the stock rally that moved the S&P 500 to new record highs.
Representatives for the firms didn't give any further comment.
The surge in consumer prices was a temporary side effect of the pandemic, which makes hedge funds betting that central banks would be slow to raise interest rates.
It was questioned that hawkish comments from the Bank of England as investors cemented expectations for a rate increase, the Bank of Canada shut down its bond buying program and Australian policymakers abandoned a key short-term yield target. The markets are expecting two rate hikes in the U.S. where Federal Reserve is expected to announce its plans for winding down its bond purchases in December 2022.
The gap between short- and long-term bond yields would increase in the face of loose monetary policy, which would happen if markets expected growth and inflation to increase, which would happen if markets anticipated growth and inflation to accelerate in the face of loose monetary policy. The difference between two and 10 year Treasury yields in the U.S. flattened by 13 basis points on Wednesday, making one of the biggest one-day moves in the yield curve of the past two decades, according to Cornerstone Macro s estimates. The two-year Treasury yield was almost doubled last month to about 0,5%. The two-year yield jumped to 1.14% from 0.66% since December 2009, when an upward move didn't approach that degree.
The volatility this year has led to heavy losses for some of the best known macro traders in the world. The yield curve would hit a crease in the U.K. and U.S. Alphadyne Asset Management, which has never had a down year in its flagship hedge fund since 2006, lost more money last week and was down 17% through October this year, according to Bloomberg on Tuesday.
Another hedge fund that suffered heavy losses is Frost Asset Management, which slumped almost 18% last month due to the sharp rise in Swedish short-term interest rates and flatter yield curves, according to Brummer Partners AB.
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