Global Macro Trading Case: Post S&L Crisis

Details of the crisis:

In 1990 to 1991 after the S&L crisis, U.S. economy was in deep trouble. To recover the economy, the Fed held interest rates at a very low level. Hedge fund managers like Michael Steinhardt borrowed money at low interest rates and purchased long-term bonds with much higher yields to earn the interest difference. The risk in this trade is that long-term interest rates would go up, driving down the value of the bonds. However, the poor economy made the demand for money extremely low. In another word, interest rates were not likely to go up.

As expected, long-term interest rates did not go up and went down instead, giving the hedge fund managers profits from both interest difference and capital gains.

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