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Weekly Brief: Higher rates boost performance, but stronger euro detracts

Last week US Treasury bond and German bund yields spiked, both hitting a new 2015 high. On Thursday, 10-year German rates reached 1.0% before losing ground later in the day. Intraday volatility reached record highs and according to hedge fund managers, the main driver behind the moves in the fixed income markets is the lack of liquidity. Brokers and dealers hold a small and shrinking percentage of the Treasury market.


Philippe Ferreira

Head of Research – Managed Account Platform

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Last week US Treasury bond and German bund yields spiked, both hitting a new 2015 high. On Thursday, 10-year German rates reached 1.0% before losing ground later in the day. Intraday volatility reached record highs and according to hedge fund managers, the main driver behind the moves in the fixed income markets is the lack of liquidity. Brokers and dealers hold a small and shrinking percentage of the Treasury market.

Overall, the impact of rates move was positive for hedge funds. CTA funds, and especially trend-following strategies, had been posting losses since the end of April on their long fixed income positions. But systems had reduced their exposures and short-term managers, in particular, had turned short. Our estimates are that CTA funds are now on average neutral to short on rates, as short exposures have been increased on the back of the moves we witnessed on Wednesday and Thursday.

On the global macro side, managers have been implementing short exposures on European rates for some time now, mainly in Germany and the UK. Most funds are playing this as a relative value trade with long positions on the US market, betting on a dovish Fed, and gaining on the rates differential over the period.

While gains were posted on hedge funds' fixed income buckets, they were mostly offset by losses on currencies. As expected in such market conditions, the Euro spiked last week, and both systematic and discretionary managers had short positions on the currency versus the USD. Following recent losses, we expect CTAs to decrease their overall short exposure and macro managers to marginally increase their bets, as the fundamentals of the short position are still here: inflation in the Eurozone picked up recently but it still stands at very low levels, growth prospects remain low in the medium term, and the ECB remains committed to implementing its QE programme.

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