They collectively amassed $5.2 billion of wagers in March that would profit if Treasuries fell, the first time they had net short positions on government debt since September 2011, data compiled by the Fed show.
‘Some Time’
The practice is allowed under the Volcker Rule that limits the types of trades that banks can make with their own money. The wagers may include market-making, which is the business of using the firm’s capital to buy and sell securities with customers while profiting on the spread and movement in prices.
While the bets initially paid off after Yellen said on March 19 that the Fed may lift its benchmark rate six months after it stops buying bonds, Treasuries have since rallied as her subsequent comments strengthened the view that policy makers will keep borrowing costs low to support growth.
On March 31, Yellen highlighted inconsistencies in job data and said “considerable slack” in labor markets showed the Fed’s accommodative policies will be needed for “some time.”
Then, in her first major speech on her policy framework as Fed chair on April 16, Yellen said it will take at least two years for the U.S. economy to meet the Fed’s goals, which determine how quickly the central bank raises rates.
After declining as much as 0.6 percent following Yellen’s March 19 comments, Treasuries have recouped all their losses, index data compiled by Bank of America Merrill Lynch show.
Yield Forecasts
“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,’” MacQueen said in an April 15 telephone interview. “The dealers are really worried here. You get really punished if you take a lot of risk.”
Economists and strategists around Wall Street are still anticipating that Treasuries will underperform as yields increase, data compiled by Bloomberg show.