Hedge fund managers, including luminaries John Paulson and Julian Robertson, are wagering that the recent rise in Treasury bond yields will continue.
They are concerned about the buildup in government that led to the issuance of more than $2 trillion in Treasurys last year.
And they are worried that fiscal and monetary stimulus will spark inflation.
“It will be difficult for the government to withdraw the economic stimulus,” Paulson said in a recent speech.
“An increase in the monetary base leads to an increase in the money supply, which leads to inflation.”
The 10-year Treasury bond yield has risen to about 3.8 percent from a low of 2.06 percent in 2008.
Paulson told the Financial Times that he is betting on higher yields through the use of options.
Robertson is betting on a steeper yield curve, which measures the premium of long-term Treasury rates over short-term rates, a person familiar with his trades revealed to the FT.
The yield premium of 10-year Treasuries over two-year Treasurys recently reached a record high.
Dinakar Singh of TPG-Axon is wagering on higher yields too, a source close to him told the FT.
Singh is using an option strategy similar to Paulson’s.
Another popular trade for hedge funds now is betting against Japan’s government bond market.
A plunge there “is going to happen. It’s a question of when,” Kyle Bass, head of hedge fund firm Hayman Advisors, told The Wall Street Journal.
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