Hedging costs hit arbitrage managers amid QE fear
Relative value managers raced to short their Treasury positions after the US Fed hinted at tapering in May, borrowing from the repo market. But demand saw hedging costs spiral.
A rush to short US Treasury bonds after Federal Reserve chairman Ben Bernanke raised the prospect of QE tapering this May saw arbitrage managers in Asia hit with rising hedging costs, eating into returns.
The Fed’s plan to pare its quantitative easing (QE) programme – hinted at in May, announced in June and potentially starting next month – sparked an uptick in fixed income managers shorting 10-year US Treasuries in anticipation of a change in the interest rate cycle.
Some repur…
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