Here’s what a hedge fund trader says happened during Thursday’s bond market slump, which sent the 10-year Treasury yield down to 1.60%

“What happened on Thursday was a complete drain on risk appetite in the fixed income arena,” said Hu, managing partner and founder of hedge fund Winshore Capital Partners, in an interview, who added that he had been on the sidelines since last week. when the liquidation of the Treasury markets accelerated.

Hu previously served as head of inflation trading at bond fund giant Pacific Investment Management, or Pimco, and his career has included stints as a trader at BlueCrest Capital Management and market maker at Credit Suisse.

His experience suggests that once bond market sales like last week’s start, valuations of the appropriate interest rate based on economic and inflation forecasts don’t matter. for the direction of short-term returns.

“I said to a colleague of mine, ‘we called the end of the sale for the seventh time, maybe it’s time to stop calling,” Hu recalls.

Still, Hu says valid concerns around a surge in inflation and a possible Federal Reserve tightening contributed to the Treasury sell-off throughout this week. But Thursday’s decision, at least, was also the result of backpedaling by market players trying to reduce their positions to avoid being caught by other rapid market movements.

See: Current bond market selloff is worse than ‘taper tantrum’ in key way, analyst says

The sharp rise in Treasury bill yields sparked a market sell-off on Thursday, which hit tech stocks and other highflying stocks the hardest, sending the Nasdaq Composite COMP,
+ 0.56%
at its biggest loss since October. The Nasdaq rebounded slightly on Friday as yields retreated, while the Dow Jones Industrial Average DJIA,
-1.50%
fell almost 470 points, or 1.5%. The main benchmarks ended the week lower.

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Part of the problem in the bond market was that market-based measures of inflation expectations might not be able to keep trucking higher if prior date Treasury yields were dormant, anchored by the accommodative stance of the market. Fed.

But traders feared that in the event that price pressures increase as much as feared, the Fed would have to tighten policy faster than expected, which would dampen inflation.

These fears helped drive up short-term rates, contributing to losses in popular strategies designed to take advantage of a surge in price pressures. Soon after, market participants unwound congested trades like yield curve slopes, when traders simultaneously buy short-term Treasuries and sell their long-term peers to bet on a larger yield spread. wide between the two deadlines.

Finally, the evaporation of buyers and a rush for the new bid on Thursday led to the worst outcome of the 7-year Treasury bill TMUBMUSD07Y,
1.126%
the history of the auction since its reintroduction in 2009, triggering the TMUBMUSD10Y of the 10-year Treasury yield,
1.415%
brief surge to 1.60%. The benchmark maturity rate fell to 1.46% on Friday.

Primary traders who were left to take the unsold bonds, one of their responsibilities in return for the privilege of negotiating directly with the Fed, may have had to temporarily raise yields to get rid of the bonds by the end of the year. the day, Hu mentioned.

“I suspect every trade was a risk reduction trade on Thursday. Then the Treasury needed to issue so many bonds, but buyers weren’t in the mood for it. Once [the auction] Hu said, referring to how bond market traders describe a poor result in a Treasury auction.