Bashing hedge funds that trade Treasuries could cost taxpayers money

ThereisnoGDP, more important financial market than American , and it is growing fast. In the 12 months to October the Treasury, on net, issued $2.2trn in bills and bonds, worth 8% of to fund America’s gaping deficit. Adding to the supply, the Federal Reserve has shrunk its own portfolio of Treasuries by nearly $1trn since mid-2022. Foreign demand is flat, meaning the Treasury increasingly needs big asset managers and hedge funds to . That is worrying some regulators. Could capricious hedgies shake the foundation of the global financial system?One concern is the “basis trade”. This is when hedge funds exploit small gaps in price between futures contracts on Treasuries, which they sell to asset managers, and the bonds themselves, which they buy. Making money this way requires high leverage, so hedge funds borrow from banks, posting Treasuries as collateral. By one estimate, in December 2022 they owed $553bn this way and the trades were leveraged at a ratio of 56 to 1.