Hedge funds see appeal in inflation anomalies

The inflation market was never over-banked, and some market participants say it has become less efficient as bank risk-taking capacity has shrunk. But this is creating opportunities for investors, if they can stomach the liquidity risk. By Kris Devasabai

Benoit Chriqui, Barclays

It has been called the “largest arbitrage ever documented” – a 175 basis point spread between US government debt and US Treasury inflation-protected securities (Tips), which emerged after the collapse of Lehman Brothers in 2008. 

As panic gripped the markets, investors sought the safety of liquid government bonds, pushing yields lower. At the same time, Lehman Brothers and its counterparties chose to dump Tips posted as collateral in repo trades and derivatives transactions. For a time, dealers

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