Fed must act to avoid repeat of Treasury market’s brush with disaster
“The US government bond market is akin to the investment world’s bomb shelter, a safe space where everyone can seek refuge when the rest of the financial system is exploding. In March, the bomb shelter itself started to rumble ominously.”
USAGOLD note: Wigglesworth quotes the head of one big hedge fund as saying “the moral hazard is massive … The brittleness [basis trades] create is a massive problem.” Basis trades, according to Wigglesworth, utilize high speed electronic trading to exploit tiny price differences between T-bonds and Treasury futures and require “massive dollops of leverage to turn small discrepancies into healthy, consistent profits.” And massive leverage, as we all know, raises the prospect of systemic risks that fall upon the central bank to mitigate when things go massively wrong. Wigglesworth raises questions and offers considerable detail at the link above.
Repost from 9-23-2020