The week of March 11, 2023, was one of chaos and volatility in the finance world, with bank failures and regulatory concerns causing panic among investors. Traders worked around the clock, with some even cutting their family vacations short to manage their funds. The US Treasury market saw some of the most pronounced and sudden price swings, with veteran traders comparing the situation to previous crises, including the Lehman Brothers collapse and 9/11. Some hedge funds made windfall profits, while others suffered punishing losses, highlighting the high stakes of trading in a post-2008 regulatory environment. Quant funds were blamed by some for exacerbating the volatility, while boutique ETF provider Quadratic Capital Management emerged as one of the winners of the week with its Interest Rate Volatility and Inflation Hedge ETF seeing a 15% jump in value.
Important Details about Wait 10 Seconds, Lose $1 Million in Markets Rocked by Volatility –
– John McClain traded bonds while on family vacation due to market panic
– Craig Gorman traded non-stop for three days from his hedge fund’s office
– Markets shook as concerns about banking sector health spread
– US Treasury market experienced extreme volatility
– Windfalls and losses were made by various traders and funds
– Post-2008 regulations have made the market more volatile and high stakes
– Quants are being blamed for exacerbating volatility
– Societe Generale CTA Index dropped 8% over three sessions
– Macro hedge funds lost 4.3%, worst drop since 2008
– Interest Rate Volatility and Inflation Hedge ETF profited from higher volatility
– Brandywine Global Investment Management placed a bet on longer-term Treasuries to safeguard funds
– Tech stocks performed well during the market turbulence.
The Wild Week for Global Markets: How Bond Traders Reacted to Fed Chair Jerome Powell’s Signal
The financial market has had many wild weeks throughout history, but few have been as volatile as the past week, which saw yields on the two-year US Treasury note sink more than half a percentage point on Monday, soaring over a quarter-point on Tuesday, and tumbling anew on Wednesday. Investors continuously recalibrated how much more, if at all, the Federal Reserve would raise interest rates. The swings, which lasted right through Friday, were so violent that they topped those triggered by the 1990s emerging-market crises, the collapse of Lehman Brothers, 9/11, and the bursting of the dot-com bubble.
Jerome Powell, the Chair of the Federal Reserve, signaled to Congress his steely resolve to ramp up policy tightening to tame inflation on March 7. This increased expectations for another supersized rate hike and pushed two-year yields above 5% for the first time since 2007. So when the troubles in the regional banking sector began to emerge just days later, many investors were caught off-guard. When Silvergate Capital and then Silicon Valley Bank were affected, it set off a panic. Monday’s plunge in the two-year yield was the biggest since 1982.
Markets reached a breaking point on Wednesday due to fresh turmoil at Credit Suisse Group AG, which set off another global flight to safety, driving yields down further. In the short span of a week, rates markets had shifted dramatically. Expectations that there would be several more months of Federal Reserve rate hikes, including at a policy meeting next week, had vanished. Instead, traders now expect more than half a point of cuts to the Fed’s benchmark rate by year-end. The chaos in money-market futures on Wednesday was so extreme that trading was briefly halted.
To Priya Misra, the tremors on Wall Street bore ominous parallels to the dark days of 2008 when she served as a rate strategist at Lehman as it went under. In the week through March 15, banks borrowed $165 billion from the Fed’s two backstop facilities to safeguard their finances as jittery depositors yanked cash.
Misra, the global head of rates strategy at TD Securities in New York, cancelled a business trip to the West Coast and started waking up at 3 a.m. to scan market moves in Europe and Asia. Bonds were swinging wildly there, too.
“With every movement in the market or headline, it’s like your blood pressure goes up or down,” says Misra.
With higher volatility, markets were being exposed as well. US dollar funding to underlying Treasuries, where bid-offer spreads widened, was one of the cracks that surfaced.
As the market went haywire, Nancy Davis, founder of Quadratic Capital Management, could scarcely contain her excitement. Her $802 million Interest Rate Volatility and Inflation Hedge ETF, which invests in inflation-linked bonds and seeks to profit from higher volatility, jumped 15% in the week through Wednesday.
“We love big moves,” says Davis, “Bring it on.”
Like all recent market crises, quants have been blamed for exacerbating the volatility with their big, ill-timed bets on higher rates. As Treasuries staged a dramatic rally, the fast-money crowd had to rush for the exit all of sudden; the losses were staggering. A Societe Generale CTA Index dropped a historic 8% over three sessions through Monday. The losers include AlphaSimplex Group’s $2.7 billion Managed Futures Strategy Fund. After soaring last year by betting on higher rates, it tumbled 7.2% on Monday alone, according to Bloomberg data, the most since its 2010 debut.
“We were on the wrong side,” says Kathryn Kaminski, chief research strategist, and portfolio manager at AlphaSimplex. “This short-bond trade has worked for 15 months. At some point, trends break, and this could be the point.”
As a group, macro hedge funds lost 4.3% in the week through Wednesday, which was the worst drop since 2008, according to the HFRX Macro/CTA Index.
Holed-up traders, like John McClain of Brandywine Global Investment Management, found themselves needing to overhaul the $2.4 billion portfolio he managed for clients at Brandywine Global Investment Management, and overhaul it fast. McClain had gone on vacation with his family to the Caribbean, but with bank failures piling up and US authorities rushing to stem the panic, he was trapped in the Hyatt hotel room trading bonds all day.
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In Manhattan, Craig Gorman saw what was coming, too. He raced over to his hedge fund’s Park Avenue office and fired up his computer at 6 p.m. For three straight days, Gorman, a founding partner at Confluence Global Capital, traded nearly non-stop, eating as he stared at his 11 monitors and sneaking in naps that would end abruptly when pings alerted him to sudden price swings or news.
Windfalls were made. A select group that included the likes of boutique ETF provider Quadratic Capital Management racked up quick profits. For many others, there were punishing losses. Quant funds run by Schroder Investment Management Europe SA and AlphaSimplex Group LLC were hammered. At Brevan Howard Asset Management, some money managers took such big losses they were ordered to stop trading. For veteran macro trader Adam Levinson, it was even worse. He’s shuttering his Graticule Asia macro hedge fund after it lost more than 25%.
“It’s nuts,” says Tony Farren, a managing director at Mischler Financial Group in Stamford, Connecticut, who began his career on Wall Street in the 1980s. Even a 10-second delay could make or break a trade right now, he says. “You could be right and still lose a million dollars.”
Tech Comes Out Ahead
While credit and bank shares also posted outsize gyrations, Big Tech proved a port in the storm with the Nasdaq 100 advancing 5.8% over the week.
In a market made more volatile by post-2008 regulations that curbed trading by Wall Street banks, the stakes are high every minute of every trading day. When market movements are this extreme, the difference between a good and a bad trade can mean millions of dollars lost or gained in a matter of seconds. With the rise of quant-driven trading and the use of algorithms for large volumes of trade, the role of the human trader is beginning to overshadowed, with fast reaction times and large-scale automation becoming the norm.