When I was a kid, we used to play Clue Jr. It’s the game where you have to guess who committed the crime where and with what weapon. Then, when I grew up, I started to play Clue Jr—Finance Edition. That’s the game where you try to figure out who left footprints all over the market as they rapidly tried to unwind some product. So here’s the question: Who got annihilated in the bond market when it ran 10% in a week after previously rallying for months? Who got liquidated and covered the trade with a market order forcing the 30-year to rally 5 points in less time than it takes me to microwave popcorn?
Could it be some big macro hedge fund? Almost every day, I see some monthly letter from a supposedly smart fund guy who thinks that bonds are going to zero as the Fed prints money. Plenty of Macro guys were short bonds and likely with lots of leverage. Did one of them get run over?
Was it a large money center bank whose in-house economist decided that bonds were going down so they were leaning the wrong way?
Was it a large broker—I mean hedge fund with cheap funding—that had an internal proprietary fund get caught the wrong way? These guys love to bet on bonds as they’re liquid so the risk guys let them play bigger than should be prudent.
I watch lots of markets. The equity market gets all the attention because lots of retail investors are involved. But the bond market is the world’s most important market as it sets the price of money. It’s also one of the most liquid markets in the world. When the price of money suddenly moves, I take notice. You don’t have 5 point moves in the 30 year bond without someone in a panic. Someone bought bonds yesterday, not because they wanted to—but because they HAD to. That someone was a very big player.
Every time something like this happens, it starts with rumors. Then there are denials. Finally, a few days later, we learn who blew up. Someone lost a lot of money in the past week and they left footprints all over the market. Once we know who, we can figure out why and then finally focus on what it all means.
Welcome to Clue Jr.—Finance Edition.