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phil
April 22nd, 2014 at 7:00 am
Primary dealers stung by Treasury rally
Yesterday, 03:25 PM ET · JPM
• Caught in the Treasury rally this month are Wall Street’s primary dealers who amassed a $5.2B short position in government paper in March – the first net short position since September 2011 – amid the hawkish rumblings out of the Fed.
• “We had that big selloff and the dealers got short then, and then we turned around and the Fed says, ‘Whoa, whoa, whoa: it’s lower for longer again,’” says fund manager Mark MacQueen. “The dealers are really worried here. You get really punished if you take a lot of risk.”
• Dealers used to short Treasurys to hedge their holdings of other types of debt like corporate bonds and mortgages, but that changed after the crisis. Corporate debt inventories have been slashed 76% from the 2007 peak thanks to capital requirements (which essentially force them to hold little but Treasurys).
• “During the crisis, the Fed went to great pains to save primary dealers,” says Christ Whalen. “Now, because of quantitative easing and other dynamics in the market, it’s not just treacherous, it’s almost a guaranteed loss.”
• Among the dealers who have reported Q1 results so far, JPMorgan (JPM) saw a 21% drop in fixed-income business, Citigroup (C) 18%, and Credit Suisse (CS) 25%.
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