Core Viewpoint - The scale of basis arbitrage trading by hedge funds in the U.S. Treasury market has reached a historic high of $1 trillion, raising concerns among financial experts about the potential for a financial crisis [1][4]. Group 1: Basis Arbitrage Trading - Hedge funds have been utilizing the small price differences between U.S. Treasury cash and futures to engage in basis arbitrage, which involves going long on Treasury securities while shorting Treasury futures [6]. - The current scale of basis arbitrage trading has doubled since 2020, indicating a significant increase in risk exposure [4]. - The leverage ratio for hedge funds engaged in this trading has risen from 6.3 times to a record 7.8 times over the past year [7]. Group 2: Market Risks and Implications - The inherent leverage ratio for long cash and short futures positions is approximately 20 times, while the leverage on Treasury repo has surged to 56 times [8][10]. - Experts warn that a relatively small change in interest rate spreads could force hedge funds to liquidate their positions, potentially leading to widespread asset sell-offs [10][12]. - The resolution of the debt ceiling issue could trigger significant market volatility, as it would allow the U.S. Treasury to issue previously restricted bonds, leading to a sudden increase in supply [13][14]. Group 3: Proposed Solutions - Experts suggest that the Federal Reserve should consider a "hedged purchase" strategy instead of traditional quantitative easing (QE) to mitigate risks associated with high-leverage hedge funds [15][16]. - The proposed "hedged purchase" would involve the Fed buying U.S. Treasuries while simultaneously selling an equivalent amount of futures contracts to avoid distorting the term premium [16][20]. - This approach aims to provide a mechanism for high-leverage hedge funds to exit their positions without exacerbating market instability [17][19].