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Wall Street Banks Closed in the Red on Friday on Reports of Hedge Fund Losses

Courtesy of Pam Martens

Bank Stock Losses on Friday, October 29, 2021

Bank Stock Losses on Friday, October 29, 2021

By Pam Martens and Russ Martens

On Friday, the Dow Jones Industrial Average, S&P 500 Index and Nasdaq Composite, all closed in positive territory. But as the chart above indicates, mega banks on Wall Street closed in a sea of red ink. Citigroup (ticker, “C”) was among the big losers, closing down 1.72 percent, followed by Credit Suisse (CS) down 1.62 percent and Deutsche Bank (DB), down 1.31 percent. JPMorgan Chase (JPM), Barclays (BCS) and Goldman Sachs (GS) closed down less than 1 percent on Friday.

The problem appeared to be the shifting shape of the U.S. Treasury yield curve.

The longer out the yield curve an investor goes, the higher the yield – unless the yield curve flattens or inverts. That typically means that the Fed has started to hike interest rates, or is expected to begin hiking interest rates, and the market perceives that the Fed is going to over-shoot and bring on a recession. Thus, short rates rise because the Fed is in a tightening mode and longer rates fall because market participants foresee that tightening leading to slower or even negative growth in the U.S. economy.

If you get on the wrong side of that trade, you can lose your shirt. Bloomberg News reported on Friday that hedge funds had lost significant sums in wrong-way interest rate bets. Other media outlets, without naming the hedge funds, also reported that interest rate bets had soured at hedge funds. That may account for the sea of red in the shares of the mega Wall Street banks on Friday. Those banks provide leveraged loans to hedge funds via their prime broker operations.


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