By Chris Gillick
The easy money in a trade that hedge funds have feasted upon during the past 12 months might soon be over. With the spread between the yields of two-year and 10-year Treasury notes at an all-time high and the yield curve at record steepness, something's got to give.
The standby bread-and-butter trade of "buy the two, sell the 10," referring to buying two-year U.S. Treasury notes and simultaneously selling their 10-year peers, was basically a can't-lose prospect in 2009. By taking advantage of falling two-year yields and rising 10-year ones—a phenomenon known as a curve steepener—funds minted profits as the 2-10 spread doubled from 144 basis points at the start of last year to 288 in December. The spread sat at 277 bps at press time.
But according to a research report issued by Bank of America-Merrill Lynch in mid-January, hedge funds have been...