Dec. 28—Australia Financial Review on Dec. 20 [published][https://www.afr.com/markets/debt-markets/the-hedge-fund-traders-dominating-a-massive-bet-on-bonds-20231220-p5esr6] another angle of the potential crash disaster waiting in the hedge fund takeover of the U.S. Treasury market: That it is concentrated in just a small handful of hedge funds, which dominate the so-called “basis trade” arbitrage of Treasury security prices vs. futures prices for the same securities. The article names ExodusPoint Capital Management, Millennium Management, and Citadel Capital, as having the ability to leverage their own casino bets by 50 times or more with borrowings from major banks. It then adds a few other hedge funds also doing huge business in the “basis trade” in Treasuries, although not as large as these three—which, according to one strategist at another hedge fund, have become “too big to fail.”
As EIR has previously reported, Treasury debt has been growing dramatically while foreign purchasers, such as China, Brazil, and even Japan, dump it. The international megabanks have also partially withdrawn from buying and holding large amounts of Treasuries—they are instead lending large volumes to these hedge funds to speculate on the shortest-term-possible bets on Treasury futures. There have been three, going on four, financial near-breakdowns due to sudden disappearance of liquidity related to the Treasury markets: the September-October 2019 “repo crisis”; the March 2020 disappearance of dollar liquidity “when this bet blew up spectacularly,” as AFR put it in reference to the “basis trade”; the December 2022 “British bonds crisis”; and the crisis now sitting in the near future.
AFR wrote: “Last week the Securities and Exchange Commission, alarmed by the sheer scale of borrowing involved, voted in new rules that may make the economics of the trade less enticing. But … crack down too hard and they could threaten the orderly [!!] running of a U.S. Treasuries market that has ballooned…. Go too easy and there is the threat of too much financial leverage building up at these hedge funds.”