Core Viewpoint - The article discusses the recent liquidity risks in the U.S. market due to the unwinding of basis trades by hedge funds, which may lead to a significant increase in U.S. Treasury yields and systemic financial risks [1][12]. Summary by Sections Basis Trading Overview - Basis trading involves arbitrage between the cash, futures, and repo markets of U.S. Treasuries, where investors buy cash Treasuries and sell futures to profit from the price difference [2]. - The cost of basis trading primarily consists of borrowing costs in the repo market, while the return is derived from the basis, which is the difference between futures and cash prices [2][6]. Risks of Basis Trading - The main risks associated with basis trading include: 1. Repo Roll-Over Risk: Increased borrowing costs if liquidity in the repo market tightens [6]. 2. Margin Risk: Potential losses if futures and cash prices diverge significantly [6]. 3. Leverage Risk: High leverage can amplify the aforementioned risks [6]. Current Market Conditions - As of Q3 2024, hedge funds hold approximately $2.06 trillion in long positions in cash Treasuries and have about $1 trillion in net repo borrowings, indicating a total basis trading volume between $1 trillion and $1.5 trillion [9][11]. - The market is currently characterized by high volatility, with the VIX and MOVE indices reaching recent highs, which may trigger increased margin requirements for hedge funds [12][16]. Supply and Demand Dynamics - The U.S. Treasury market is experiencing an oversupply, exacerbated by a new debt ceiling proposal that could increase the deficit by $5.8 trillion over the next decade [16][19]. - Weak demand, particularly from foreign investors, has been noted since late last year, which could further pressure liquidity in the market [16][19]. Geopolitical and Economic Factors - Escalating trade tensions and geopolitical risks may lead to capital outflows from the U.S., contributing to a potential "triple whammy" of declines in stocks, bonds, and the dollar [19][20]. - Hedge funds, as significant net buyers of Treasuries since the beginning of the balance sheet reduction, have substantial exposure across various asset classes, which could facilitate the spread of risks across markets [22][24]. Future Outlook - The likelihood of systemic financial risks is increasing, particularly with the potential for liquidity shocks following the resolution of the debt ceiling in May-June [26]. - The Federal Reserve may be compelled to restart quantitative easing (QE) to stabilize the market, which could further exacerbate wealth inequality and contradict current economic policies aimed at strengthening the middle class [26].
中金：美国流动性冲击、重启QE与主权财富基金