A violent move in government bond markets sparked by the collapse of Silicon Valley Bank has upended one of the most popular hedge fund trades of recent years.
The bank’s failure on Friday sparked concerns that the US Federal Reserve may need to shy away from aggressive rises in interest rates to avoid putting the country’s broader financial sector under strain. It also pushed some investors to look for safe retreats. Both factors sent bond prices soaring.
Analysts and investors say that swiftly collided with a huge consensus trade in markets that interest rates would keep on climbing to combat inflation and bond prices would keep on falling — a wager that delivered outsized gains for many hedge funds last year. Now, some of the same macro and computer-driven hedge funds that celebrated a hugely successful 2022 have been caught out, sending some of them to rush out of their positions and amplifying the bond market move.