Investors are reassessing their conviction in the reflation trade that has captivated Wall Street this year after a hawkish tilt by the US central bank inflicted losses on some fund managers.
Betting against the price of US government bonds was a winning play earlier this year, with hedge funds and other investors raking in sizeable gains as the economic recovery gathered pace. But recent gyrations and the spectre of a policy pivot from the Federal Reserve have heaped significant doubt on whether investors should remain in the trade.
“It is obvious that the reflation trade got rinsed,” said Thanos Bardas, deputy chief investment officer for fixed income at Neuberger Berman. “The market overreacted, [but] the uncertainty has increased.”
Several big-name hedge fund were caught up in the maelstrom, including Andrew Law’s Caxton Associates and Chris Rokos’s Rokos Capital.
The rationale for the reflation trade had centred around expectations that the…