Biggest Borrowers & Lenders in the $13.5-Trillion Repo Market: How the Hedge Fund “Basis Trade” & Money Market Funds Fit In
It works really well, until it suddenly doesn’t.
Source: Wolf Street
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DW NOTE
The $13.5 trillion repo market now depends on hedge funds borrowing Treasuries to exploit tiny pricing gaps between cash bonds and futures — the so-called basis trade — while money market funds provide the collateral. When rates were zero, basis trades had no margin for error; now, with the 10-year at 5.18% and the Fed hiking into an oil shock, the spreads that made the trade profitable are exactly the spreads that disappear first in a liquidity crunch.