Highest-Ever Treasury Short Positioning by Hedge Funds into Last Week Was “Accident Waiting to Happen,” Massive Short-Covering Ensued, Pushed Down Yields. “Basis Trade” at it Again

But now, the 10-year yield jumps 15 basis points from Friday. Short-covering has run its course?

By Wolf Richter for WOLF STREET.

The fireworks over the past few weeks in the US Treasury market involved, as you’d expect, hedge funds creating and then covering massive highly leveraged short positions.

According to an aggregate of Commodity Futures Trading Commission figures going back to 2006, cited by Bloomberg this morning, hedge funds had taken on the most ever leveraged net short positions in Treasury futures trades by October 31.

Amid these short positions, the 10-year Treasury yield rose to 5% by October 23, and the rising yields mean falling prices in the cash Treasury market, and the Treasury-short bets were working, but that moment of 5% glory was followed by the insta-plunge in yields the same day, followed by further drops in yields. Dropping yields means prices rallied. And yet during that week, hedge funds continued to pile into this leveraged short trade until October 31.

And by October 31, the net short-positions in Treasury futures had reached the highest level ever, and this extreme positioning “was an accident waiting to happen,” Gareth Berry, strategist at Macquarie Group, told Bloomberg.

Then on November 1, the Treasury department’s Quarterly Refunding announcement, designed to whack down longer-term yields, pulled the rug out entirely from that short trade. And those trades unraveled.

“Price action in Treasuries for the past few months was a classic case of a persuasive story feeding the price action, until it went too far, leading to an overshoot which is now correcting,” Gareth Berry, told Bloomberg.

These short trades also involved the “basis trade”: selling Treasury futures and buying bonds in the Treasury cash market and extracting a small profit from the difference between them, but multiplied by huge leverage.

The basis trade has come under SEC scrutiny, which is supposed to regulate hedge funds; and by bank regulators who are worried because banks supply some of the funding to hedge funds for this trade, and they could get hit by the blowback. And the Fed is worried because hedge funds also borrow in the repo market, and leveraged bets blew out the repo market in 2019, when the Fed ended up stepping in to bail out those goofballs. And leveraged bets blowing up contributed to the crazy volatility in the Treasury market in March 2020 when the Fed then threw heaven and earth at it.

In August 2023, Fed researchers found that hedge funds were back at it: They found that short futures positions in the 2-year, 5-year, and 10-year Treasury contracts rose by $411 billion in 10 months, to $715 billion, and that total leveraged Treasury shorts rose to $860 billion – but that was based on data as of May 9. And the trade has ballooned since then. No one really knows how large this trade it.

And the Fed researchers pointed at this basis trade as a vulnerability for financial stability:

“The cash-futures basis trade is an arbitrage trade that involves a short Treasury futures position, a long Treasury cash position, and borrowing in the repo market to finance the trade and provide leverage. This trade presents a financial stability vulnerability because the trade is generally highly leveraged and is exposed to both changes in futures margins and changes in repo spreads. Hedge funds unwinding the cash-futures basis trade likely contributed to the March 2020 Treasury market instability.”

Today, Fed Governor Lisa Cook in a speech on financial stability, pointed at hedge funds and the basis trade:

“For example, several indicators suggest that Treasury cash-futures basis trades—trades that involve the sale of a Treasury future and the purchase of a Treasury security deliverable into the futures contract—likely gained in popularity recently. Because the basis trade is often highly leveraged, a funding shock or heightened volatility in Treasury markets could force hedge funds to abruptly unwind their positions at potentially distressed prices.”

“I will keep an eye on how these leveraged trades might interact with Treasury market liquidity.”

The SEC has proposed new rules to reform the Treasury market to get a handle on these leveraged bets; among other things, those rules would treat hedge funds like the broker-dealer arms of banks.

Ken Griffin, CEO of the hedge fund Citadel which is up to its ears in the basis trade, pushed back against SEC scrutiny, and said that regulators should focus on banks and their lending to hedge funds, in order to reduce the risks to the financial system, he told the FT yesterday.

“If regulators are really worried about the size of the basis trade, they can ask banks to conduct stress tests to see if they have enough collateral from their counterparties,” he told the FT.

Meanwhile, back in the Treasury market, the massive short-covering that helped push down the 10-year yield last week seems to have run its course, and today the 10-year yield already jumped by 15 basis points from the low on Friday to 4.65% at the moment.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  97 comments for “Highest-Ever Treasury Short Positioning by Hedge Funds into Last Week Was “Accident Waiting to Happen,” Massive Short-Covering Ensued, Pushed Down Yields. “Basis Trade” at it Again

  1. AV8R says:

    A trade Ackman timed perfectly.

    Did his announced coverage of his position start the rally??

    • Wolf Richter says:

      I called Ackman today, some underling told me he couldn’t get to the phone, he’s busy piling back into the trade.


    • kiers says:

      Stanley Druckenmiller too. Not just Ackman! Read on bberg. He’s yelling at Yellen for not letting his trade make whale profits!

  2. William Leake says:

    Investment rate (annualized) on the 6 month T-bill Oct 30 2023 was 5.56% at auction. On Nov 6 2023 it was 5.47%. To my mind, this is not much of a change. I buy at auction and hold to maturity. I will stick with T-bills (6 months and under). Notes and bonds are too crazy for me, plus they yield much less.

    If I want two years or longer, I would likely just do CDs with the smallest early withdrawal penalty I could find. Brokered CDs are okay, but they are subject to the vagaries of the market if you sell before maturity, and do not compound. One big downside to CDs is that the state taxes the interest. I wish I lived in Florida or Texas.

    • sufferinsucatash says:

      See that’s what I’m sort of trying to figure out.

      In retirement what is the best strategy?

      Keep the mutual funds working for you, with the risk the market will tank for a few years.

      Or go into super low risk stuff. But most years the low risk stuff doesn’t earn much. And I def need to do some catch up earning.

      so many avenues!

      • Wolf Richter says:

        Interestingly, when I was checking how desperate banks were to get deposits via brokered CDs at my broker, I saw that several banks offered 4-year 5%+ CDs, Morgan Stanley among them.

        That’s interesting because they wouldn’t offer it if they thought that in 2024 or 2035 or 2026, yields would be lower. They offered it because they thought it was a good deal for them — seems they’re expecting longer rates to go higher.

        • Gattopardo says:

          “They offered it because they thought it was a good deal for them — seems they’re expecting longer rates to go higher.”

          They fund themselves in a multitude of ways, so I wouldn’t put too much weight on them issuing some 4 year CDs @ 5%.

        • ChS says:

          “That’s interesting because they wouldn’t offer it if they thought that in 2024 or 2035 or 2026, yields would be lower.”

          I assumed those rates were offered on callable CD’s so they don’t have much interest rate risk for the bank.

        • Wolf Richter says:

          Non-callable, I checked. That was my first thought too.

        • rojogrande says:


          I use Fidelity. I was looking at CDs today and could get 5.05% call protected CDs for the 4 and 5 year term. 5.7% was available for a callable 5-year CD. Don’t know what other brokers offer, but you can get 5%+ and call protection.

        • Brian Jarrard says:


        • Master of the Muniverse says:

          To extend duration on the low/no risk options, why is no one chasing munis? You can lock in prime rated, general obligation and fully insured municipals, tax free with a tax equivalent yield over 6.5%. Minimum call date 7++ years out. If yields drop, you have the option of selling early at a profit. Or, just sit tight and hold to maturity. It seems like a no brainer, but nothing is ever that simple, so what am I missing?

        • Wolf Richter says:

          Master of the Muniverse

          Yes, the yield is better, but munis are not risk-free, not even GOs. I held California bonds during the Financial Crisis when California ran out of real money to pay its bills and had to issue IOUs to vendors. So I did some sweating there. I even doubled down and bought some Revenue Anticipation Notes, but that was a gamble to get the yield. If you want credit-risk free, munis are not the answer.

        • Bailouts4Billionaires says:

          I honestly don’t understand the appeal of CD’s. They take your funds and invest in treasuries, you often get a lower yield, I think also pay state taxes (which you don’t with treasuries directly), and charge you a fee for the privilege? (Are there fees? not sure) Why not just buy the treasuries yourself on treasury direct?

          If the yield is higher, what are they investing in? I guess it’s FDIC insured about to $250k so who cares. Personally I prefer laddering into the shorter-term treasuries at the moment, but would love to hear about what others are doing.

        • Wolf Richter says:


          For lots of people, CDs are a lot more convenient.

        • C says:

          Disagree that this reflects their views on rates in 2-3 years. It’s how high they have to prove their yields to attract deposits when competing with MM funds offering +5% yields and daily liquidity. They can think whatever they want, no one is depositing money in a 2% CD.

        • rojogrande says:


          I don’t think extended duration CDs are directly competing with MM funds. The daily liquidity feature of a MM fund is probably not what someone who wants a guaranteed yield for 4 years is looking for. Banks can compete for deposits with MM funds by offering competitive shorter-term CDs or high yield savings accounts if they think longer-term yields will be lower in the future. I think MM funds and extended duration CDs are different parts of the market.

        • It could also be a loss leader. CDs are a retail product. Important to keep funds under management high, there are all sorts of benefits to that.

        • PL says:

          Some banks, especially regional banks, have been using brokered deposits / CDs to offset deposit withdrawals they are experiencing due to the aftermath of the regional bank failures earlier this year. Would be interesting to see if the banks offering those higher 4-year 5%+ CDs are experiencing a high percentage of deposit withdrawals, excluding brokered (wholesale) deposits.

    • Aman says:

      William is there any benefit (fees, taxes etc.) in buying from the auction vs buying via a brokerage such as Schwab?

      I usually buy from Schwab. Am I missing something?

      • William Leake says:

        Aman, from what I understand buying Treasuries from Treasury Direct or from a broker like Schwab is exactly the same. Schwab does not charge a commission to buy or sell Treasuries, same with Vanguard. The advantage of using a broker is that you can sell Treasuries before maturity (I have not yet done so). With Treasury Direct you have to move the Treasury to a broker in order to sell it before maturity. Also Treasury Direct’s website is something out of the early 1980s (some people might like that). Phone Schwab to be sure of all this.

        Suffering, I sort of just laid out my retirement plan. We used to get close to zero interest on Treasuries, but those days are over. I think the Fed has learned its lesson with ZIRP, but maybe not. I get 5.5% with no risk (and state income tax-free) for now, and I will adapt when necessary. “Berkshire Hathaway holds nearly $100 billion in Treasury bills as of Dec. 31, 2022”, for what it is worth.

        • Doubting Thomas says:

          I am right there with you, William Leake. I am heavy, heavy on Treasury bills of three months or less duration. I will react when something new happens and I can do better than 5.5% interest with no credit risk and no state income tax. Real estate is dreadful right now, plus I don’t want to rent to other humans… too much drama. The stock market is overvalued. I spent a career doing financial valuations. My math says the S&P 500 is currently overvalued by 5% to 10%, and my math assumes current earnings forecasts are perfect, that there will be no further increase in long-term risk-free interest rates, and no increase in the equity risk premium demanded by investors (despite all caution having been thrown to the wind for the past three years). One, two or all three of these factors could go bad, and I would be elated to have chosen Treasury bills.

          Per Investopedia: Berkshire held a record $157 billion in cash equivalent investments as of September 30, 2023. Of that, $126 billion was Treasury bills. So, Berkshire absolutely sees the value in short-term Treasuries. Me, too. I hope Berkshire, you and I are right.

        • Eider says:

          The non-competitive minimum bid is $100 in Treasury Direct. That may be a difference between Schwab and Treasury Direct.

        • John H says:

          William Leake-

          Good comments, but I disagree with your “no risk” statement.

          With any bond portfolio that doesn’t match your maturity to when you’ll need the money (either to spend on consumption or to spend on reinvesting) you have REINVESTMENT risk. This explains why insurance companies buy long bonds even though the yields appear low.

          There is no such thing as a riskless investment, IMO.

        • Bead says:

          I’m just rolling fours (treasury bills) and should have enough warning to climb the ladder. I expect Buffett’s thinking the same.

          As hungry as the federal government is, I can’t imagine how this approach fails. I suppose the trillion dollar coin might inconvenience me.

        • Aman says:

          Thank you so much. Highly appreciate the effort to reply.

      • Gattopardo says:

        I think Schwab marks up bonds, but that’s invisible to you. It’s baked into the yield to maturity.

        • William Leake says:

          Gattopardo, NO. No mark-up or commission on Treasuries at Schwab. They do have mark-ups (small) on CDs.

        • vecchio gatto veloce says:

          Schwab’s ‘Value Advantage Money Fund’ allows a fairly quick turn around time to move, if one wants to buy stocks, and pays an interest rate that is very close to a 6 month Treasury. To me, it is a good place to park some “dry powder.”

        • Gattopardo says:

          Funny, William, as Schwab’s fixed income desk told me they do!

        • C says:

          Bid/ask spread is different than a commission or markup. They’re paper thin on treasuries.

        • William Leake says:

          Gatto, NOPE again. I just phoned Schwab fixed income desk. If you buy Treasuries at auction there is no mark-up and no commission. If you buy or sell in the secondary market, there is a very tiny commission.

    • Glen says:

      My situation with retirement and taxes as well although in January I might do some 1 year treasuries simply because the tax doesn’t come due until maturity so gives me an extra year to pay taxes on them.

      • Ghassan says:


        But do you still get the interest up front just like the 6 months?
        I’m asking because I plan to do the same this winter/spring.


        • Glen says:

          Treasury bills(1 year or less) pay at maturity according to Treasury direct

  3. sufferinsucatash says:

    Any idea how much of a percentage these trades gain?

    It has to be more than 5% because you can pickup 5% easy.

    What would possess a bank ceo to play chicken like this with their whole bank (via the hedge funds)? It has to be worth the squeeze.

    • Hardigatti says:

      5% is no good. They are using OPM (other people’s money) which costs them at least 6-7%. If they make 1% on their basis trade and leverage it 10x and do that 5 times a year, they’d collect 50% minus their cost of money. Of course, there is the risk you short blows up. But if you are big enough you’ll get bailed out.

  4. Loeden says:

    This may be unpopular but I sure do wish they weren’t allowed to gamble with money they don’t have. The idea of having to bail out leveraging recklessness for the solidity of the financial sure does rub me the wrong way.

    • Louie says:

      Totally agree with Loedon here.

      This kind of “engineering” does not seem to benefit society in anyway as far as I can see and can cause great harm to our society as a whole. Not a good arena to hold a playground for the few.

      • Hardigatti says:

        Oh, it does benefit society. Just not the part of society we are in.

        • 91B20 1stCav (AUS) says:

          …those rarely-seen (except in tv ads) ‘pretty people’ in the casino?…

          may we all find a better day.

        • Harvey Mushman says:

          @91B20 1stCav (AUS),
          “…those rarely-seen (except in tv ads) ‘pretty people’ in the casino?…”

          So true, in real life the casino people are 100lbs overweight and have an oxygen bottle on a little cart.

    • Bobber says:

      Yes, why is the Fed providing funding to gamblers via the repo market? A hedge fund could blow up in an instant and default on their repos, handing losses to taxpayers in the end. The government should have nothing to do with hedge fund funding.

      • Wolf Richter says:

        Currently, the Fed is NOT providing funding via repos. Opposite. The Fed’s repos = $0.

        It did step into the repo market in late 2019 until June 2020.

        Currently, the Fed is draining $1 trillion FROM the repo market (borrowing from the repo market) via its reverse repos. This causes repo rates to be above 5.3% (Fed’s RRP rate), so hedge funds have to pay more if they borrow in the repo market.

    • polistra says:

      Yup. In any other context this is blatantly illegal. You can’t borrow your neighbor’s car and sell it.

    • Brian says:

      Especially when you consider that “playing the market” is a zero-sum game. For somebody to win, somebody else must lose. (Actually negative-sum because of transaction costs).

      Only “investing” has a net positive return.

      • Tony says:

        The bankers run the ponzi so they already know ahead of time when they’re going to implode the entire thing. So the bankers and insiders win and everyone else basically gets wiped out. It’s the old story of tell a big enough lie for long enough and everyone believes it. These suckers in stocks will all be bag holders.

  5. Gary says:

    To the average citizen, the Treasury’s quarterly refunding announcement is like the orange juice crop report of the movie: “Trading Places;” with Jerome Powell and Janet Yellen as the “Duke” brothers.

    • fullbellyemptymind says:

      One of the best Philadelphia movies ever (2nd only to “trick baby”). Eddie Murphy panhandling on his rolling cart in a snowy Rittenhouse square. Winthrop’s house on Delancey. I do miss that town.

      Also one of the few movies that actually tries to explain how financial markets work. Don Amechi, Ralph Bellamy, Jamie Lee Curtis; amazing cast. And don’t forget Dan Akroyd in blackface, that part alone is worth the re-watch.

  6. spencer says:

    It was just the end of filling up the TGA.

  7. Greg Nikolic says:

    The SEC, as usual, is being hyper-aggressive and nitpicking.

    When they were given largesse to pursue almost any infraction, they acted eagerly — all those business-suited men and women, like a school of piranhas in some shallow South American creek.

    We need a more judicious SEC, not a RoboCop-like enforcer.

    • Wolf Richter says:

      The SEC is as usual years behind, and it doesn’t even get interested in acting until after something blows up, and even after it blows up, it might not act — see the repo market blowout in late 2019 and the March 2020 Treasury blowout both mentioned here — and it still hasn’t acted as of today, and it might never act, because it has been captured by the companies it is supposed to regulate.

      Calling the SEC a RoboCop-like enforcer” made my day. Spit-out-coffee funny.

      • 91B20 1stCav (AUS) says:

        …beat me to it, Wolf! Many thanks!

        may we all find a better day.

      • Herpderp says:

        But Elon Musk said….

      • CCCB says:

        Is there some reason why these trades and the wall street companies that keep making them can’t just be allowed to blow up and take down the reckless and obviously incompetent ones that need bailouts to survive?

        If it truly gets to the level of impacting the financial stability of banks and the safety of their depositor’s money, protect the depositors
        and let the rest sink.

    • Einhal says:

      The SEC lost any credibility it had when it got a tip that Madoff was doing EXACTLY WHAT HE WAS IN FACT DOING, and STILL couldn’t find the fraud or do anything about it.

    • Nick Kelly says:

      When the SEC was repeatedly told by Harry Marcopulous that Madoff had to be running a Ponzi scheme, some junior staff would drop by, check out all the ‘trading screens’ and leave. A few left behind their resumes.
      Madoff never executed any of the trades. All anyone at SEC had to do was confirm them to end his scam. He was never caught by any outside investigators: the GFC made people need money back even if Madoff ‘returned’ a constant eight percent. This unwavering consistency was what alerted math guy Harry M.

      Apologies to Harry M for not spelling his name right, at least so says spell check. I should have entered the title of his book, a good read:
      ‘No one would listen’

      • Einhal says:

        Yep. He literally handed the SEC the smoking gun, and they still couldn’t get it together.

      • Bead says:

        I believe SEC had a reputation for being paid to sit on their thumbs and watch naughty films.

        • JimmyNC says:

          You can tell how serious they were about regulation when the SEC was created by who they put in charge: Joe Kennedy! “Takes a crook…”?
          Their mandate for protecting the public includes the caveat: “with the least possible interference to legitimate business”

      • Tony says:

        Never stated is the true or more modern definition of the word ponzi. It’s never a ponzi until the ponzi ends. If the ponzi keeps on going endlessly then by todays’ definition but not the definition of yesteryear it’s not a ponzi.

  8. Thomas Curti says:

    Even the gods-of-the-universe have to be careful with shorts and leverage.

    Seriously though, this means we are back in middle through until we get more data.

    • RH says:

      If you have inside knowledge, you can take risks on that. Uncomfortably, I agree with Fink and Dimon (may god grant that never happen again) that the recession I predicted months ago is more likely. Why? Read history and compare it to our news. Read AOL article and MSN article with 10 experts on recession. It will be Zimbabwe-style stagflation. Shorting treasuries makes sense if you knew this was going to happen and were guarantee bailouts, if you lost, from your uncle “FED.”

      • Wolf Richter says:

        For the past 18 months, nearly everyone has predicted the recession, even the Fed’s staff. This is the most anticipated hope-for begged-for recession ever. For over a year, people were sure we were ALREADY in a recession. YouTube has been full of this recession-is-here stuff for 18 months, and those videos went viral. I have never seen such recession mongering before.

        And yet, Q3 had red-hot economic growth, and there’s still no recession.

        Shorting Treasuries makes sense because of the higher-for-longer mantra. But it you think that something blows up and the Fed steps in and pushes down yields — as you suggest — you want to be long Treasuries.

        • The code is pretty easy: If the President is a Democrat, you are supposed to think collapse is imminent, regardless of what is going on around you. Likewise, if the President is a Republican, deficits suddenly do not matter and tax cuts and coddling the wealthy are the solutions to all the world’s problems.

        • The Real Tony says:

          The amount bet per person at the racetracks around the world has not fallen. This is the tried and true infallible method for predicting a recession and has never been wrong yet. Don’t look at the handle but the total attendance divided by the total amount wagered also referred to as the handle. Gamblers are the last ones to throw in the towel on wagering.

      • Drink! says:

        You said recession twice! Drink! Drink!
        Oh…Zimbabwe-style stagflation! Drink!
        If you said Argentina not defaulting again, I would make you do an inverted keg hit! Party!

  9. WB says:

    Higher for longer…

    to hell with the hedge funds, at this point they are nothing but a drain on the productive parts of the economy. Useless paper-pushers that have taken advantage of free money fr some 20+ years… nothing but degenerate gamblers with inside information and a house credit card.

    Cut them off and let them go bankrupt already! The sooner we allow for true price discovery, the better off we will all be.

  10. Glen says:

    Doesn’t look like the desired 10 year will hit the rates most of us want. Perhaps down the road or perhaps I am not seeing something that could unfold that could drive them to 6%+(outside of higher inflation which seems unlikely right now).

    • Wolf Richter says:

      Patience, dude.

    • Greg P says:

      I’m not saying this will happen, but a possible cause would be another round of government shut-down talk. All it would take is the rumor of a downgrade in the federal government’s bond rating – particularly given the large systemic budget deficits they are currently running.

      • Fast Eddie says:

        And what exactly will a downgrade due to the market?

        I’m not trying to be difficult, but where will the money go? There’s no other market large enough and liquid enough to absorb even a fraction of the USG market. The EU is circling the drain and their bond market is a fraction of the USG market. UK? JPN? Russia? Turkiye?

        There’s nowhere for the money to go.

        And in any event, there is zero risk of default. Any country that has bonds denominated in its own currency can’t default (unless, for some reason, it just decides not to pay). I’m not talking about purchasing power, just default

        What’s the old saying – the dice are loaded but it’s the only game in town.

        • rojogrande says:

          A downgrade may focus investor minds on the possibility their investment may ultimately be paid back in inflated dollars. The money can go into CDs, shorter-term treasuries, money market funds, etc., until investors believe the yields compensate them for the inflation risk of holding longer-term treasuries. The money doesn’t need to leave the US market for investors to refuse to buy long-term treasuries at current yields. Not sure if this will happen, of course, but it’s a possibility.

        • MM says:

          “Any country that has bonds denominated in its own currency can’t default”

          No but they can inflate away their currency, which some would say is a soft default.

  11. Leonardo says:

    According to Axios, and other outlets, the mass unwinding of the basis trade back in March 2020 when Covid hit was a significant contributing factor to the huge expansion of the Fed’s balance sheet, in just that month, in order to stabilize the treasury market. $2.5 trillion in one month alone!

    “In March 2020, this bet went bad and amplified the chaos in the most important market on earth, the market for U.S. Treasuries. The Federal Reserve was forced to pump massive amounts — about $2.5 trillion — of newly printed money into the markets to put out the fire.”

  12. Charles says:

    Isn’t one reason that they are slow in cracking down on this that the hedge funds are one of the few buying treasuries?

    • Wolf Richter says:

      Nah, the last thing anyone needs is a highly leveraged short-term trade than can cause havoc.

      Treasuries have been incredibly popular with yield investors since yields started rising. You can see it here in the comments. People haven’t seen 5% 10-year Treasury yields in 15 years and 5.5% T-bill yields in 20 years. Interest rate repression ravaged yield investors’ cash flow, and now they’re finally making a little money. Treasury money market funds, Treasury bond funds, and Treasuries at TreasuryDirect and at brokers have become a hot commodity.

      • William Leake says:

        “At the end of September, Berkshire held about $340 billion of stocks; $157 billion of cash, mostly in U.S. Treasury bills maturing in less than a year; and just $22 billion of bonds.”

        Not just the little guys.

      • Alex says:

        Yes, those little investors are yield starved and the FEDS have them feeding like cattle at the feeding stations. But, why take long term risk and hold for 10 to 30 years when the T-Bills offer a larger reward? Even most small investors are not that stupid. I think some of this unwinding was China and Japan making a couple extra dollars shorting Futures off their $2 Trillion in US Long Bonds? And the Feds are carrying on like there is a conspiracy on the $33 Trillion in Debt by the Hedge Funds. Wake Up America, the US Dollar will become the North American Peso.

  13. Tbv3 says:

    I agree with Griffin, Don Wilson (DRW’s CEO), and Terrence Duffy (CME’s CEO).

    If (like me) people fear the Treasury market poses an ever-present risk of illiquidity because of basis volatility they should advocate for higher repo rates to tamp down volatility, higher income taxes and/or reduced federal spending to reduce our need of debt issuance.

    The 4 or 5 HFT firms that transact 70% of the CME’s daily volume in interest-rate futures don’t need help understanding volatility or duration risk, nor do they expect bailouts if/when they get annihilated—as I presume they did on March 9, 2020, when longbonds soared 13 points, resulting in losses of (presumably?) tens of millions, not hundreds of millions of dollars.

    If regulators want to present themselves like Helen Lovejoy as “thinking about the children”, they first need to identify which children shouldn’t be in the game for lack of sufficient cash. That requires close inspection of ledgers.

    The CME makes (at least) twice-daily margin checks on their biggest customers; they also make unannounced visits to member firms to inspect books.

    In contrast, what do we Helen Lovejoys know about the GSEs? What size unrealized losses are the GSEs sitting on with their $9 trillion of mortgage loans?

    What should worry taxpayers more: basis fluctuations wiping out some hft firms resulting in wider bid-ask spreads, or mortgage foreclosures ticking up requiring another GSE bailout?

    • John H. says:

      What worries me most is the prospect of a tax-payer financed support for any sector of the financial services market. Bailout and subsidy sow the seed of the next even bigger need for bailout and subsidy down the road.

      Wolf’s comment in the article is exhibit #1:
      “…leveraged bets blew out the repo market in 2019, when the Fed ended up stepping in to bail out those goofballs. And leveraged bets blowing up contributed to the crazy volatility in the Treasury market in March 2020 when the Fed then threw heaven and earth at it.”

      And here we are, perhaps on the verge of another bailout. What difference if it’s privately owned trading firms or a gigantic federally owned mortgage finance portfolio? Markets assume the feds have their back…

  14. Debt-Free-Bubba says:

    Howdy Folks. So, this is how The Stock boys make $$$ without ZIRP and QE ????? Guess it makes more sense doing this, than being a roofer……..

  15. MM says:

    Picking up pennies in front of a steamroller…

    • SpencerG says:

      Yeah… but it is BILLION of pennies… that is what makes the risk seem worth it to them.

  16. SocalJim says:

    This article misses strategy of the Treasury basis trade. There is a CTD “Cheapest To Deliver” embedded option in the trade, and that option’s value is the game. When the Treasury market gets more volatile than expected, embedded option becomes more valuable, and the trick is to close or exercise the trade when the embedded option value moves in your favor. The option belongs to the seller of the futures contract. On Wall Street, I noticed that not many people understood this trade.

  17. grimp says:

    How much leverage, is “highly leveraged”? Sorry if I missed it in the article or comments.

    • Bengt Løyer says:

      Those in the game say “l e v v e r e d up”

      (with the “e” pronounced as in “lend”)

  18. longstreet says:

    The basis trade in itself is not where the risk lay.
    Nothing more than writing a covered stock call against your long stock.

    The lending and leveraging is the danger and Griffin is correct. The arrangement seems ripe for cross collateralization shennanigans. Could not the underlying that is to be eventually delivered against the short future “theoretically” also be pledged elsewhere, (say for a loan) if the player was dishonest?

  19. BeeKeeper says:

    a bit more details (UST 10Y NOTE option and futures combined commitments as of 10/31/23):

    NON-COMMERCIAL (hedge funds, etc.): Long 554,341 | Short 1163306
    COMMERCIAL (banks, etc.): Long 3861498 | Short 3357204


  20. Fed Up says:

    Great that it went up yesterday. Going back down today. I’m sick of it. Yes, I know it’s volatile, but we need it to remain high.

  21. There is no collateral. This is what happened in 2008, the collateral was offshored, positions undermined. I can take out a PLOC and do anything I want with it. Then prices drop, I get a call, and I say keep the securities man, they’re yours (I have the money in the Caymans..) Then of course the Fed rushes in because willful destruction of phony asset value is not allowed. So my stock positions roar back, and I buy more using my offshored funds. The SEC puts new rules into money laundering to prevent the drug dealers from bringing cash across the border, but everyone else, including wealthy Chinese can still buy prime RE on the west coast using cash.

Comments are closed.