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IMF Says the U.S. Treasury Market Could Be a Systemic Global Threat

IMF Headquarters in Washington, DC. Credit: IMF

April 21, 2024 (EIRNS)—The IMF Global Financial Stability Report 2024: The Last Mile: Financial Vulnerabilities and Risks adds to the warnings of systemic threats in the increasing volatility and speculative nature of the U.S. Treasury market. It says hedge funds now control the Treasury futures market: “A concentration of vulnerability has built up, as a handful of highly leveraged funds account for most of the short positions in Treasury futures,” citing its Figure 1.28, panel 4. This could be a systemic threat to the financial stability of the global economy, the IMF says.

The degree of concentration in the “basis trade” derivatives on Treasury futures, is that eight or fewer very large hedge funds hold 30% of all futures positions on 5-, 10-, and 20-year Treasury securities, and 50% of all futures positions on 2-year Treasuries. And they are overwhelmingly concentrated in “short” positions, meaning their derivatives betting is that Treasury interest rates will rise further.

The embedded joke involved, is that the media of “The Street” have been reporting that “the Street” thought the Federal Reserve would cut interest rates up to seven times in 2024, while “The Street” itself has been betting on the opposite. But jokes aside, the extreme concentration of Treasury futures holdings in a few very highly debt-leveraged speculative funds, means that if their speculations hit liquidity problems, so will the entire trans-Atlantic financial system. Yahoo News reports that “Essentially, the [IMF] report suggests that certain funds have become so crucial to the Treasury and repo markets, that they might now be considered too big to fail.”