HEDGE CRASHES BOND YIELDS

Scores of hedge funds, already suffering through one of the poorest performance stretches in recent memory, got blasted last Thursday after one giant fund sold investments on the belief that the Federal Reserve was done cutting rates.

The funds took a financial hit when the spread between the yield on the two-year note and the 10-year note narrowed suddenly.

The spread, known on the Street as the 2-year/10-year curve steepener, narrowed after the unidentified macro hedge fund sold a $10 billion position in cash two-year notes and bought billions in 10-year notes.

The sale caught many funds by surprise – and dropped the yield difference from 172.9 basis points to 158.8 basis points in just two days, according to Market News International, which reported on the yield move and sale last week.

The curve steepener investment had become a favorite of hedge funds this year as they bet – and profited – on lower short-term rates. The curve had advanced from 102.7 on Jan. 2 to 205.8 last month before easing gently until last Wednesday.

Many funds had hung in there hoping the Fed would continue to cuts rates.

But when one fund surprisingly sold a $10 billion position, many suffered, traders said.

“What is going on with the front end?” said David Ader, US bond strategy head at RBS Greenwich Capital. “The easy story is of impending supply and pure logic that the Fed has to temper the pace of its (rate cuts) if only because it needs some bullets for the future when unemployment ticks up to 5.2 percent, 5.3 percent, 5.5 percent, or more.