Fed minutes flag Treasury-market leverage as a risk to financial stability
The use of leverage in the $27 trillion market for U.S. government debt has been of concern since at least last year amid greater scrutiny of the so-called basis trade.
The trade is a maneuver that involves taking a short Treasury futures position and a long Treasury cash position, while borrowing in the repo market to finance the trade and to provide leverage.
In a paper released last August, staff at the Fed board and the Treasury Department had indicated that the use of basis trades by hedge funds warranted “continued and diligent monitoring.”
According to a report by Bloomberg on Tuesday, leveraged positions in Treasury futures have risen to a record high ahead of the Fed’s annual symposium in Jackson Hole, Wyo.
Some of those leveraged positions were attributed to the basis trade.
Vivien Lou Chen MarketWatch 21 August 2024
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