- Chain reaction after ECB punishes bets on dollar gains
- U.S. two-year spread over bunds narrows most since September
The most crowded trades in global debt and currency markets unraveled Thursday, and it wasn’t pretty.
After months of betting on diverging monetary policies in the U.S. and Europe, investors got whipsawed after the European Central Bank said it would keep the size of its monthly asset purchases unchanged, even though it committed to extending quantitative easing by six months.
That disappointed traders, and the ensuing chain reaction rattled assets on both continents: The extra yield on Treasuries over bunds tumbled and the dollar fell the most against the euro since 2009. The weakening greenback, by raising the specter of quicker inflation, helped fuel the largest steepening in the U.S. yield curve in four years.
"This is a lesson," said David Keeble, head of fixed-income strategy at Credit Agricole SA in New York. "Even if you only mildly underwhelm the market, you get a big reaction."
The severity of the moves underscores how investors had piled into the same wagers as policy makers signaled tighter monetary policy in the U.S. and more accommodation in the euro region. It also gave some Wall Street strategists a sense of deja vu -- it was reminiscent of the rout in U.S. and European government debt from April to early June, when traders panicked at a hint of inflation and wiped out about $800 billion in bond-market value worldwide.
"Everyone was on the wrong side of the trade" both times, said Keeble. "When these markets turn around, they do it quickly."
The latest data on futures positioning show how crowded some trades have become.
Hedge funds and other large speculators were the most downbeat on two-year Treasuries in nearly a year during the week ended Nov. 24, according to the latest data from the Commodity Futures Trading Commission. In currencies, speculators boosted wagers on dollar strength for the past five weeks in the lead-up to the Fed’s Dec. 16 decision on interest rates.
The dollar was little changed at $1.0943 per euro as of 2:14 p.m. Tokyo time Friday.
"There is a tendency in these markets for some macro players to believe that certain outcomes are guaranteed," Douglas Borthwick, head of foreign exchange at New York-based brokerage Chapdelaine & Co., said in an e-mail Thursday. “Unfortunately for them, time and time again central bankers have differed from the prevailing wisdom.”