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Some hedge funds stick with reflation trading despite the pain in the bond position

By Maiya Keidan

Jul 21 (Reuters) – Some hedge funds hold on to their government bond bets even after a sharp rally in US Treasuries earlier this week squeezed bearish investors.

Leveraged funds were net short positions in several longer-term Treasuries in the futures markets, according to recent data from the Commodity Futures Trading Commission. This potentially left them vulnerable to the bond rally as some market participants left the so-called reflation trade fearing US growth would slow in the second half of the year.

New data released on Friday could provide a more complete picture of how much the rise in treasury prices, which are moving against yields, has put off bearish investors.

Benchmark 10-year government bond yields were around 1.30% on Wednesday, rebounding from a low of just under 1.13 earlier this week. They peaked at over 1.77% at the beginning of the year.

However, some hedge fund managers believe there is more headroom for reflation trading, which has resulted in investors amassing bearish treasury bets and stocks of companies that would benefit from a strong rebound in US growth.

“The consensus is that the current level of returns is just too low for the level of inflation we have … and it doesn’t look like hedge funds have used up their positions,” said Troy Gayeski, partner and co-chief investment officer at US-based SkyBridge Capital, a fund of hedge fund with $ 7.5 billion in assets under management.

Factors driving the decline in government bond ratings include projections of sustained inflation, skepticism that the delta variant of COVID-19 will have a significant impact on growth, and expectations that the Federal Reserve will come sooner than expected will begin to ease their monetary policy.

Hugo Rogers, who as Chief Investment Officer of Deltec Bank and Trust manages $ 1 billion in discretionary multi-asset portfolios and a long-short hedge fund, made higher returns on his bearish treasury bets than the returns earlier in the year increased.

The story goes on

More recently, however, the reflation trade “has been a bad place,” he said.

Still, Rogers is sticking to his bearish bets and expects the benchmark yield on 10-year government bonds to be above 2% as inflation lasts longer than the markets are pricing it in.

“We don’t think the delta or tapering will be enough to derail growth or inflation,” he said.

A London-based hedge fund manager told Reuters that a short position in US Treasuries had cost the company about 60 basis points, but his fundamental view remained that yields would be higher through the end of the year.

“The reflation trade is far from over,” the manager said, adding that an expected surge in US debt issuance in October could drive yields higher.

“I think the regime change narrative still holds,” said Robert Sears, chief investment officer at Capital Generation Partners.

“Next year, in a positive growth environment, we would expect interest rates to rise, and I think that’s the reason most managers stick with it.”

Others are reluctant to look at the direction of Treasuries.

Edouard de Langlade, chief investment officer at Swiss macro hedge fund firm EDL Capital, has avoided the bond markets believing the Fed will maintain a cautious stance longer than expected.

“Right now you just can’t be long in the fixed income market because there is no value, and short positions have been a very painful trade lately so we’re on the sidelines.” (Reporting by Maiya Keidan; Additional reporting by Ira Iosebashvili; Editing by Richard Chang)

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