Hedge Funds Snapped Up Treasuries as Reflation Trade Crumbled
(Bloomberg) -- Hedge funds dominated Treasury buying flows in June as the global reflation trade ran out of steam.
Investors domiciled in the Cayman Islands, a territory used as a base for leveraged investors and hedge funds, snapped up $27 billion of U.S. debt that month, according to Treasury Department data published Monday. That was the largest net purchase of any region.
The buying came after Cayman-Island funds sold almost $150 billion of U.S. sovereign bonds in the first five months of the year amid expectations growth and inflation would accelerate as economies reopened from Covid-19 lockdowns.
“Given many hedge funds are domiciled in the Cayman Islands, this could indicate there was some short covering that occurred in June,” JPMorgan Chase & Co. strategists including Jay Barry in New York wrote in a note. Still, these purchases only reversed a small portion of the selling that occurred in the first half, they said.
The unwind of the so-called reflation trade -- typically associated with bets on higher interest rates and a steeper yield curve -- has been painful for many well-known funds. While U.S. 10-year yields fell just 13 basis points in June, the spread between five-and-30-year yields shrank by 29 basis points, the biggest monthly decline in more than six years.
Hedge fund Alphadyne Asset Management saw its flagship fund lose 4.3% in June, its worst month ever, as its managers had been positioned for a steeper U.S. curve and higher interest rates, according to people familiar with the matter who asked not to be identified because the information is private. Other hedge funds including Caxton Associates, Rokos Capital and Brevan Howard’s main fund also suffered losses in June, the Financial Times has reported.
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