Fixed-income hedge funds have started unwinding swaps and offloading municipal bonds to take profit after the recent surge in volatility. Ying Chen Li, director in the fixed income strategy division at Merrill Lynch in New York, explained that many hedge funds held short positions on LIBOR swaps as hedges for their portfolios. Under these trades they paid a fixed-rate based on LIBOR and received floating. As interest-rates declined over the last year the hedges had been losing money, however, recent rocketing volatility has put the trades in profit.
The 10-year swap spreads rocketed to 52 basis points last Thursday, up from 40bps two weeks previous.
