Hedge Funds Whipsawed in Frantic Trading Spur Fed Rate Hike Bets

Frantic trading in US Treasuries early Thursday showed telltale signs of hedge funds hastily closing out positions that were vulnerable to losses, which exacerbated volatility in both the cash and futures markets around 8:30 a.m. in New York.

In the cash curve, a sharp flattening move dropped the spread between 2- and 10-year yields by almost 8 basis points over a 4 minute period, to its lowest level in almost a year. Steepeners were very popular among hedge funds, and a lot of the movement Thursday was caused by the unwind of that trade, said Brij Khurana, portfolio manager at Wellington Management. “This is a pretty big flush out in terms of steepeners.”