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Hedge Fund Shares Drop Amid Bond Sales
Hedge funds' appetite for the interest rate spread trading strategy in the U.S. Treasury bond market has declined, as borrowed assets have fallen by 20% since the beginning of the year to approximately $1.2 trillion. This decrease is due to changes in interest rates and improved trading conditions that have narrowed profit margins. The focus has especially shifted away from short- and medium-term futures (two and five years), with short positions dropping by over 40% compared to March, and long positions decreasing by 30%. This decline reflects diminished demand from fund managers for extending interest rate sensitivity and the Treasury's bond buyback program aimed at boosting prices and reducing spreads. Meanwhile, easing of the Supplemental Leverage Ratio (SLR) requirements has allowed banks to increase their bond holdings, despite Federal Reserve warnings about the risks associated with high leverage.
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