Heinz, stronger yen meets macro hedge funds...
June 14, 1999
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Treasury Bonds Fall as Hedge Funds
Seek to Unwind 'Yen Carry' Trades
By GREGORY ZUCKERMAN and MITCHELL PACELLE
Staff Reporters of THE WALL STREET JOURNAL
The bond market suddenly is worrying about more than interest rates.
Bond Investors Need Not Wait for Fed to Raise Interest Rates
Treasury bonds plummeted late last week partly on concern that hedge funds were dumping bonds, and amid a rash of selling by holders of mortgage-backed securities. The difficulties sent yields on Treasurys, which move inversely to their prices, to their highest levels since November 1997, and raised the specter of more pain this week when the market greets key economic data.
Hedge funds, private investment pools for wealthy individuals and institutions, have been a concern for investors since difficulties at Long-Term Capital Management LP in September nearly crippled the capital markets.
'Yen Carry' Trouble
In recent days, many hedge funds have been hurt by a speculative investment called the "yen carry" trade. Such a strategy entails borrowing Japanese yen and investing the proceeds in U.S. Treasurys. The maneuver has been quite profitable because Japanese interest rates have been low, while yields on U.S. Treasurys much higher.
But the yen has rallied in recent days, thanks in large part to a stronger-than-expected report on the Japanese economy released Thursday. This makes it more expensive for investors to repay their borrowed yen. Meanwhile, U.S. Treasurys have continued to slump, also hurting these speculative investors.
As a result of the losses, at least some hedge funds have begun to "unwind" their trades by dumping U.S. Treasurys, traders say. And while it isn't clear how many hedge funds hold these positions, the selling has spooked an already nervous U.S. bond market, and spurred selling by investors worried that more hedge-fund selling is around the corner.
Speculation that big hedge-fund group Tiger Management LLC was losing money on its yen-carry position, and talk that Tiger was dumping Treasurys, caused angst in the market on Friday. Earlier this year, George Soros's flagship Quantum Fund and other hedge funds lost money in yen-related trades.
Tiger's Exposure
But Tiger has less than 10% of its portfolio in nonequity investments, according to a person familiar with the group, and hasn't faced margin calls, or demands for more collateral, from lenders in recent days. Tiger has sliced its leverage since the fall, according to this person. People familiar with Tiger's operations say the funds are up 0.3% so far this month, leaving them down about 7% for the year. And a spokesman for Tiger said speculation about redemptions was overblown.
Meanwhile, a spokesman for Soros Fund Management said the $6.6 billion Quantum Fund was down 19.1% for the year through April 12, but in recent weeks has recovered somewhat, and was down 14.6% for the year through last Wednesday. The spokesman declined to comment on the fund's investments.
So-called macro hedge funds, which make directional bets on currencies, bonds and stocks, have been struggling this year. Through May, macro funds were up on average just 1.52%, compared with 9.76% gains for hedge funds overall, according to Hennessee Hedge Fund Advisory Group.
Selling by mortgage-backed bond investors has been just as important as worries about hedge funds lately. When Treasurys sell off abruptly and rates climb, as they have been recently, fewer homeowners refinance their homes, so fewer mortgage bonds "prepay," or mature. As a result, mortgage investors find their portfolios underperform, and they turn to selling Treasurys to raise cash. |
