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Increasing illiquidity in the treasury market could pose a financial market risk -BofA

A trader works on the floor of the New York Stock Exchange (NYSE) in Manhattan, New York City, USA, August 9, 2021. REUTERS / Andrew Kelly / File Photo

NEW YORK, Nov. 1 (Reuters) – Rising illiquidity in the $ 14.8 trillion US Treasury bond market could spill over into other financial markets as hedge funds reduce their risk tolerance, Bank of America warned in a report Monday.

Leveraged hedge funds in particular have likely suffered huge losses from the r -id surge in short-term government bond yields, the report added.

“These moves exposed the still fragile market conditions for US Treasuries,” wrote Mark Cabana, head of US interest rate strategy at Bank of America.

Rokos C -ital Management and Alphadyne Asset Management have suffered losses due to improper positions in government bond yields, Bloomberg News reported.

The warning comes as expectations that r -id inflationary gains could cause the Federal Reserve to hike interest rates faster have helped flatten the yield curve as quickly as possible since 2011. L1N2RP2KS

The Federal Reserve’s Open Markets Committee is widely expected to announce Wednesday that it will begin cutting its bond purchase program by $ 120 billion per month.

While the move to end support to the economy at the start of the coronavirus pandemic has been well communicated to investors, some investors fear that rising inflation will force the central bank to process its bond purchases faster and eventually raise interest rates sooner than that proposed by the Fed.

Reporting by David Randall Editing by Mark Potter

Our Standards: The Thomson Reuters Trust Principles.

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