shadowsource
A Flash In The Pain
- Joined
- Jun 1, 2001
- Posts
- 1,664
This story is a trip! The Treasury Secretary is profoundly incompetent, but you don't need to read the whole thing. BILLIONS of dollars.....
THE WALL STREET JOURNAL, 11/2/01
Traders Suffer Losses
On Move by Treasury
By GREGORY ZUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL
The Treasury Department's sudden move on Wednesday to cut short new sales of 30-year Treasury bonds has caused heavy losses on Wall Street trading desks, traders say. The losses to securities firms and hedge funds likely add up to billions of dollars.
The reason: The Treasury's move wrecked some of the most popular, and successful, trades of this year, transactions that some big bond players only recently began piling into. The Treasury's announcement also ruined some of the most popular hedges used by Wall Street firms and big investors to protect their positions in some corporate and other bonds.
And while there is a winner for every losing trade resulting from the decision on the 30-year bond, of course, some say there was such a shock to the market during the past two days that it potentially has undermined the credibility of the Treasury Department -- particularly Treasury Secretary Paul O'Neill, already mistrusted on Wall Street, and his chief market aide Peter Fisher, who has been well respected in financial circles -- and could hurt its ability to work with investors to manage the nation's debt.
Why is there so much pain? For much of the year there was one sure bet in the bond market: that the Federal Reserve would keep cutting interest rates, to spur the slumbering economy. So traders bought short-term Treasurys, which do best when the Fed cuts rates; that is, their prices usually rise as investors rush to grab yields that look generous in contrast to what is coming down the pike. They often used leverage, or borrowed money, to amplify their returns.
And, in the wake of the Sept. 11 terrorist attacks, a consensus arose among bond aficionados that the government would have to sell more long-term bonds, such as the 30-year bond, to raise money for new spending programs. So many big investors and trading desks began taking bearish positions in 30-year Treasurys, even as they bought up short-term Treasurys, on the assumption that the additional supply would drive down the price of those long-term bonds. The effect of these moves was to "steepen" the yield curve, the imaginary slope between short-term and long-term bond yields.
Since Sept. 11 the "steepening" trade became the hot move on Wall Street, as latecomers jumped on board.
In the past two days, however, the worst of all events took place for all these investors and traders. The Treasury's decision to stop selling 30-year bonds sent prices soaring -- the bonds posted their best two-day gains in 14 years -- hurting the investors betting against these securities. But short-term Treasurys barely moved. The big bond bet had turned bad.
"Everyone was bragging they were doing the steepening trade. Now they're not talking," says James Bianco, president of Bianco Research LLC, in Barrington, Ill. "Now it's caused a tremendous amount of pain. The steepening trade was the most popular trade ... because no one thought the 30-year would disappear, and everyone figured the Fed would cut rates next week."
Exactly who were the biggest losers in the past two days isn't clear. Rumors swirled on Wall Street, but major players denied they were the ones suffering. Some pointed out that most firms use less leverage in their trades than just a few years ago, so the losses could be spread among a number of firms, rather than focused on one player using a risky strategy.
Those who banked on the steepening trade have been scrambling to cover their positions by buying up 30-year bonds, a big factor in the steep gains of these securities in the past two days.
"Because the curve steepening has been so dramatic this year, there's a number of leveraged players who have had steepening trades," says Pat Haskell, head of U.S. government-bond trading for Credit Suisse First Boston. "Now, they are turning their positions around."
The Treasury Department's decision also has hurt some holders of riskier bonds, including corporate securities, traders say. To protect against interest-rate moves that can hurt the price of these holdings, they usually hedge themselves by selling short, that is they sell borrowed Treasurys, interest-rate swaps and other instruments.
But the huge jump in 30-year Treasurys wasn't accompanied by a similar climb in the prices of long-term corporate bonds. So traders and investors who were shorting long-term Treasurys as a hedge on other positions have experienced painful losses in the past two days. "A lot of people in the market were caught shorting Treasurys, and they got creamed," says the head of corporate-bond trading at a major Wall Street firm.
For Wall Street firms, the losses particularly sting because bond trading and issuance has been one of the bright spots in an otherwise dreary year for profits. While some traders say their firms lucked out and held a lot of 30-year bonds before Wednesday's surprise announcement, others say all firms are working hard to assess their exposure to the recent eye-popping moves in the market.
While nursing losses, many traders say the Treasury Department's handling of its historic decision to end sales of 30-year bonds has added risk to the Treasury market, perhaps forcing yields higher on some securities. And there have been scattered indications of difficulties trading Treasurys in the past two days. All that could hurt the Treasury Department's continuing efforts to sell debt at the lowest rates.
"If you don't know when issuance will be, or how much, you have to assess a risk premium to Treasurys," says one senior trader on Wall Street.
Wall Street had previously speculated, indeed at times recommended, that the Treasury Department might eventually eliminate the 30-year bond. The grumbling -- much of it, to be sure, by investors on the wrong side of the market -- was more about the timing of the decision, coming without any lead-up or even one last auction and with the budget surplus expected to disappear at least temporarily.
Treasury Department officials were themselves surprised by the magnitude of the rally in the 30-year bond on Wednesday, given how much bond prices had already rallied on Tuesday's dismal consumer-confidence report.
In an interview, the Treasury Department's Mr. Fisher said, "There was no way to make the announcement and not have some reaction. The most transparent way for us to make our decision public was to have it come out as part of our quarterly refunding announcement."
Treasury officials also questioned whether a single additional auction before the suspension would have reduced the resulting scarcity premium the announcement created
THE WALL STREET JOURNAL, 11/2/01
Traders Suffer Losses
On Move by Treasury
By GREGORY ZUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL
The Treasury Department's sudden move on Wednesday to cut short new sales of 30-year Treasury bonds has caused heavy losses on Wall Street trading desks, traders say. The losses to securities firms and hedge funds likely add up to billions of dollars.
The reason: The Treasury's move wrecked some of the most popular, and successful, trades of this year, transactions that some big bond players only recently began piling into. The Treasury's announcement also ruined some of the most popular hedges used by Wall Street firms and big investors to protect their positions in some corporate and other bonds.
And while there is a winner for every losing trade resulting from the decision on the 30-year bond, of course, some say there was such a shock to the market during the past two days that it potentially has undermined the credibility of the Treasury Department -- particularly Treasury Secretary Paul O'Neill, already mistrusted on Wall Street, and his chief market aide Peter Fisher, who has been well respected in financial circles -- and could hurt its ability to work with investors to manage the nation's debt.
Why is there so much pain? For much of the year there was one sure bet in the bond market: that the Federal Reserve would keep cutting interest rates, to spur the slumbering economy. So traders bought short-term Treasurys, which do best when the Fed cuts rates; that is, their prices usually rise as investors rush to grab yields that look generous in contrast to what is coming down the pike. They often used leverage, or borrowed money, to amplify their returns.
And, in the wake of the Sept. 11 terrorist attacks, a consensus arose among bond aficionados that the government would have to sell more long-term bonds, such as the 30-year bond, to raise money for new spending programs. So many big investors and trading desks began taking bearish positions in 30-year Treasurys, even as they bought up short-term Treasurys, on the assumption that the additional supply would drive down the price of those long-term bonds. The effect of these moves was to "steepen" the yield curve, the imaginary slope between short-term and long-term bond yields.
Since Sept. 11 the "steepening" trade became the hot move on Wall Street, as latecomers jumped on board.
In the past two days, however, the worst of all events took place for all these investors and traders. The Treasury's decision to stop selling 30-year bonds sent prices soaring -- the bonds posted their best two-day gains in 14 years -- hurting the investors betting against these securities. But short-term Treasurys barely moved. The big bond bet had turned bad.
"Everyone was bragging they were doing the steepening trade. Now they're not talking," says James Bianco, president of Bianco Research LLC, in Barrington, Ill. "Now it's caused a tremendous amount of pain. The steepening trade was the most popular trade ... because no one thought the 30-year would disappear, and everyone figured the Fed would cut rates next week."
Exactly who were the biggest losers in the past two days isn't clear. Rumors swirled on Wall Street, but major players denied they were the ones suffering. Some pointed out that most firms use less leverage in their trades than just a few years ago, so the losses could be spread among a number of firms, rather than focused on one player using a risky strategy.
Those who banked on the steepening trade have been scrambling to cover their positions by buying up 30-year bonds, a big factor in the steep gains of these securities in the past two days.
"Because the curve steepening has been so dramatic this year, there's a number of leveraged players who have had steepening trades," says Pat Haskell, head of U.S. government-bond trading for Credit Suisse First Boston. "Now, they are turning their positions around."
The Treasury Department's decision also has hurt some holders of riskier bonds, including corporate securities, traders say. To protect against interest-rate moves that can hurt the price of these holdings, they usually hedge themselves by selling short, that is they sell borrowed Treasurys, interest-rate swaps and other instruments.
But the huge jump in 30-year Treasurys wasn't accompanied by a similar climb in the prices of long-term corporate bonds. So traders and investors who were shorting long-term Treasurys as a hedge on other positions have experienced painful losses in the past two days. "A lot of people in the market were caught shorting Treasurys, and they got creamed," says the head of corporate-bond trading at a major Wall Street firm.
For Wall Street firms, the losses particularly sting because bond trading and issuance has been one of the bright spots in an otherwise dreary year for profits. While some traders say their firms lucked out and held a lot of 30-year bonds before Wednesday's surprise announcement, others say all firms are working hard to assess their exposure to the recent eye-popping moves in the market.
While nursing losses, many traders say the Treasury Department's handling of its historic decision to end sales of 30-year bonds has added risk to the Treasury market, perhaps forcing yields higher on some securities. And there have been scattered indications of difficulties trading Treasurys in the past two days. All that could hurt the Treasury Department's continuing efforts to sell debt at the lowest rates.
"If you don't know when issuance will be, or how much, you have to assess a risk premium to Treasurys," says one senior trader on Wall Street.
Wall Street had previously speculated, indeed at times recommended, that the Treasury Department might eventually eliminate the 30-year bond. The grumbling -- much of it, to be sure, by investors on the wrong side of the market -- was more about the timing of the decision, coming without any lead-up or even one last auction and with the budget surplus expected to disappear at least temporarily.
Treasury Department officials were themselves surprised by the magnitude of the rally in the 30-year bond on Wednesday, given how much bond prices had already rallied on Tuesday's dismal consumer-confidence report.
In an interview, the Treasury Department's Mr. Fisher said, "There was no way to make the announcement and not have some reaction. The most transparent way for us to make our decision public was to have it come out as part of our quarterly refunding announcement."
Treasury officials also questioned whether a single additional auction before the suspension would have reduced the resulting scarcity premium the announcement created
