The Basis Trade: US Treasuries, Arbitrage, hedge funds, and Leverage-how it may affect you

What you are seeing in the debt Market is a combination of many moving parts: hedge funds using leverage on United States Treasury debt-bills specifically but less of notes because bills are short-term. You'll need to understand two things being long and asset and short a derivative of the same assetthis is key.This strategy can be used for any asset class that trades a derivative of it such as a futures contract, or an option contract of an equity (stonks). Now on to the US Treasury arbitrage opportunity or exploitation depending on your point of view. It exists however the profit is very small on a per trade basis meaning a single trade. Hedge Funds buy US Treasury Bills/Notes but will stick with bills for this example as they also borrow money on a short term basis-overnight. They buy existing T bills using cash but they also short the futures or derivatives of the same treasury bills. What they care about is the price difference between the actual bill and the derivative of the same bill-thus is Arbitrage and the strategy works if they hold the bill to maturity as that is the intent of this trade. As already mentioned the profit from this trade is very small on a per trade basis. This is where massive leverage comes into play as you couldn't make much money doing this on a single trade basis-you need a lot of these trades to make a decent profit. So what do they do? Jack themselves up to the tits by borrowing in the Repo or Private Market they can then buy the treasuries and the derivative and pocket the difference if you use massive amounts of leverage and do this trade thousands or tens of thousands of times a day because if you do you can see how profitable it will be. But there is a catch to doing this successfully as the rate of repo (their COF or cost of funding) must remain consistent or you will be forced out of your trade if the cost of funds or securities/collateral changes dramatically/see uptick in SOFR rates as this is affecting this trade slowly but could blow it out altogether if the hunt for cash gets out of hand.

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>>20060388

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Part 2 Repo/Private market lending rates change on a daily and minute by minute-when shit starts habbening quickly-basis but not by very much so if you experience a sudden or dramatic change in that rate you have to exit your trade no questions asked because it's no longer profitable for you to carry that trade at the cost of funding because the profit margin is so small. The Arbitrage or price discrepancy exists because asset managers, insurance companies and pension funds buy futures on treasuries-they are long treasury futures. The leveraged hedge funds are on the opposite side of that trade they are short the futures. This allows both sides to use a lot less cash for the exposures to US Treasuries and get the same profit and use less cash by doing it in the futures Market as opposed to just purchasing or shorting the actual debt instrument. This exists because it takes less cash to buy the derivatives so as those three entities push the price up of the futures the actual issued debt instruments the treasury debt themselves are "undervalued" compared to the futures-this is how arbitrage works by creating a small difference in vale of the same product in different vehicles to transact in.

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>>20060394

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Part 3. The hedge funds using massive leverage to buy the derivatives of treasuries (on both sides as less cash needed for futures) and short the futures and the difference in price can be a few pennies or it can be fractions of pennies but if you do it enough times you'll see how it starts to add up to a big profit if it goes your way-but you need stable rates over the life of the bills (in this example) because you are borrowing on a short term basis as mentioned already. When those insurance companies, pension funds and asset managers actually buy straight up US Treasuries they go for the new ones and this is important because those are way more liquid than the futures/derivatives but also have a negative impact on value if sold en masse to EVERYONE who owns them and are nowhere near this trade. Easy peasy for the hedge funds right? Not so fast as what happens when you have rates rise up (value of both bill and futures contract drop) dramatically? You get a crescendo of sales of both-the Bills AND the futures that were supposed to be held to maturity to realize the small gains so suddenly those have to be sold at losses. It is a domino effect because everyone has to unload the trades on both sides (who are in this trade in THIS way) and to make matters worse if you still hold those instruments and can't sell them they continue to drop in value-the Foreign US debt holders face a similar situation as if they sell too much you devalue what you continue to hold. Not unlike the situation at Silicon Valley Bank where they had an ass ton of US Treasuries they had to sell at a loss to fund the "bank run" .So the last and most important point is why this affects you

Those same asset managers, insurance companies and pension funds that are in this blown up and outsized trade own your money and have pledged the contents of your accounts to private money or the Repo markets as collateral to obtain the money to pull off these trades. Now it’s not JUST those accounts you own as they do use own money but the assets they own are not all their own (look up hypothecation) as if you’ve invested into a hedge fund you are in this trade too whether you like it or not. Also remember the #1 rule of Wall Street and that is ALWAYS use other peoples money. The biggest problem with this is that this trade continues to get larger and larger the more stable rates are (and why the sudden jump in short and medium term rates was quickly stomped on or this trade above would have unraveled in a BIG way and if you think you've seen a treasury market lock up like the ‘Repocslypse’ at the end of 2019-you've not seen anything yet even at the levels they are at right now which continue to grow

Please visit Investopedia and look up terms you may not be familiar with as not enough space to explain it however have done muh best to keep it relatively easy to understand

https://www.investopedia.com/

>>20060388, >>20060394, >>20060400 MktFag: The Basis Trade: US Treasuries, Arbitrage, Hedge Funds, and Leverage-how it may affect you

>>20060495

> it's because something stupid's been cut n pasta'd.

Assumptions- go try to find

Its completely original unlike your reactions

I’ll be waiting for you to locate this alleged “cut and paste’d” job

The floor had been open for you yet all there is are reactions

The ego you have is completely off the charts

But you knew that

If you actually put in the effort before someone else’s did without the “oh I’m so smart and yer not”

Fuckin’ hilarious

Each time

>>20060560

Kek

It’s nothing from ZH at all which proves you did not read it and what little that is used is usually shredded but again had you read any of them you’d see that

Me sensitive?

I’m not the reactionary BS artist broseph you are.

It is quite funny seeing nothing from you yet all of a sudden yer the “expurt”

Be proactive about it but that won’t be habbening anytime soon

Do the stock picking next bro

And then the convoys with yourself

Lubs those

3c8764

Then like “magic” the id dies after being BTFO

But “No ip hop”

You’ll remember this from last weeks “muh no ip hop” in which your “no ip hops” were described back to you in detail from the night prior and current bred it was in and wut habbened then?

Another ded id

Couldn’t make that up if I tried

Kek

>>20060853

>>20060889

Kek

Came back from the other id and change the tune nao

“B-b-but muh cut and paste job”

Too easy

Find someone else who will stoop to the level you at

Been shaving muh balls longer

>>20060905

You think I’m clicking that shit Nigga?

Kek

>>20060921

Sure bro whatever you say-cuz it’s just that

You slipping’ though as it used to somewhat of a challenge ain’t no mo

pure ego and ip hops

That you keep coming back sez moar than anything you could type

Kek

Bye!

>>20060925

>>20060947

The most retarded and overused narrative here

“Muh shill team 6”

Wut would this board be without you ‘protecting it’from “that” made up crap

Night B

tap,tap and ttyl

And w if you still here

>muh oodles

tuck these children in a for ya go

Kek

>>20060992

Kek

I’m not as militant bout Itpretty harmless in fact

All in good fun got one somewhere for PFing somewhere

NIGHT