Tuesday, May 04, 2010

Hedge Funds: Very Short 10 Year Treasuries

Societe Generale is out with a report that hedge funds are net short against 10 and 30 year treasuries, in fact, net very short, as the graphic below displays.

Why is this important?

Two reasons:

1. If the Hedgies are right then their bet would pay off (and big time) if interest rates rise, thus the hedge funds are forecasting inflation or rising interest rates (or both).
2. If the Hedgies are wrong look for another wave of systemic financial crisis caused by massive leveraged losses. There is quite a bit of evidence (unless of course you buy food or gasoline) that we are in a deflationary,not inflationary environment currently. If true, interest rates on these bonds could go down - which would potentially cause massive losses on the hedge fund bets.

The question is - what banks are exposed to these hedge funds and are any of these hedge funds so large that they could cause systemic risk if the trade goes bad?

Scott Dauenhauer CFP, MSFP, AIF