Market Movers – June 2021

Hawkish tones from the Federal Reserve caused yields to creep lower for longer-dated bonds in June as year-over-year inflation figures reached levels not seen since the summer of 2008. The Fed addressed the rising inflation concerns by signaling rate hikes may be happening in 2023, a year sooner than the market had been pricing in.

The so-called reflation trade that was profitable for many CTAs in the first half of the year reversed course after the June Fed meeting, causing many managers to be caught wrongfooted, especially from short positions on the longer end of the yield curve. During the first half of the year, the Fed’s tone was thought to be more dovish. The Fed adopted a policy of “average inflation targeting,” and the resulting trends caused many managers in the CTA space to take short positions in U.S. Treasuries. However, after the inflation numbers in June indicated a year-over-year rise of 5.0%, the largest 12-month gain since the summer of 2008, the Fed reversed course, adopting a more hawkish tone toward the possibility of rate hikes and the related bond-buying program. Trend-followers were the most affected by the Fed’s signaling, suffering losses from longer-dated 30-year treasuries, where yields dropped to levels not seen since February of this year.

 

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