Hedge funds wary of betting on rates

Despite widespread consensus on the direction of interest rates in the US and UK, many hedge funds are wary of making bets, partly because they expect dealer constraints to exaggerate volatility when the first hikes arrive.

Before Ben Bernanke’s now-famous warning that the US Federal Reserve might rein in its bond-buying programme last May, hedge funds were among those betting on continued low interest rates. The Fed chief’s comments sparked a mass U-turn and, as a side-effect, revealed a new reality of the fixed-income market – burdened by new rules on capital and leverage, dealers were no longer willing to buy up and sit on unwanted risk positions, with the result that liquidity dropped and prices gapped