ECB Flags Basis Trade Risks in Europe’s Government Bond Market

(This is same thing that went on in our bond markets but it cooled off due to the regulators making hedge funds register for this trade-nao Europe has got the crowded ‘Basis Trade’ to deal with-explanation coming in plain english for non-financial types; don’t need the book definition-know it so spare me the muhs)

A leveraged trade that’s worrying regulators worldwide has caught the attention of the European Central Bank, which pointed to signs the strategy is gaining traction in the region. The ECB noted a group of offshore hedge funds has become increasingly present in Europe’s government bond repo market, suggesting growing use of the so-called basis trade.The strategy, which looks to exploit price differences between futures and bonds, has come under scrutiny in the US after it contributed to market turmoil at the start of the pandemic in 2020.

The hedge funds in question are mostly domiciled in the Cayman Islands and hold more than half of investment funds’ positions on euro-area government bond futures, according to an ECB report published on Friday. They also account for almost all the activity of non-EU investment funds in the region’s government repo market. The ECB downplayed the potential threat posed by the basis trade, noting it was being conducted on a smaller scale, and with more balanced net futures positions, than in the US. That may reflect factors including the smaller market distortions required for the strategy to pay off, and the higher costs of arbitraging, according to the report.

The central bank analysts also warned that other hedge fund investment strategies could pose a greater danger. Those include leveraged directional trades, which can trigger price spirals as traders rush to unwind bets going the wrong way, they said. Leveraged trades are “associated with higher financial stability risks than basis trades,” ECB analysts wrote. “Spillovers to the euro area government bond market could be amplified, should these entities face liquidity strains in the US Treasury market.”

https://www.bnnbloomberg.ca/ecb-flags-basis-trade-risks-in-europe-s-government-bond-market-1.2075096

The board won’t accept the link (flags it as spam and even edited it but no go) directly to the ECB report so the above article has to do.

From Dec ‘23

Praying for ‘soft landing’ of US$1 trillion basis trade

https://www.thestar.com.my/business/insight/2023/12/11/praying-for-soft-landing-of-us1-trillion-basis-trade

>>20892996

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

(This was spoken into device and formatted so it that is why it may read like a transcript-just substitute EU Bonds/Bills for US Treasuries)

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 and 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.

>>20893023

Repo/Private market lending rates change on a daily and minute by minute basis-when shit starts habbening quickly-but not by very much when ‘quiet’ as 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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>>20893027

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.

However you need stable rates over the life of the bills (in this example) because you are borrowing on a short term basis. 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 a lot 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.

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 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/

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>>20893058

>muh

>>20891925 lb

SAM837 G5 continues back to JBA from its Tel Aviv depart and stop at Brussels

Saudi AF SVA7045 737Ministry of Financedeparted Riyadh and on descent for Lisbon

Another one of these ACs arrived at Tokyo overnight >>20891254 pb

Senior Chinese official meets Saudi finance minister

Senior Chinese official He Lifeng met with Saudi Minister of Finance Mohammed bin Abdullah Al-Jadaan in Beijing on Monday. The two sides exchanged views on China-Saudi Arabia economic and trade relations, global economic governance, as well as other issues.

He, a member of the Political Bureau of the Communist Party of China Central Committee and director of the Office of the Central Commission for Financial and Economic Affairs, said that China is advancing its modernization drive in an all-round way, while Saudi Arabia is vigorously implementing its Vision 2030. The two sides should focus on implementing the important consensus reached by the leaders of the two countries, strengthen the synergy of development strategies, deepen multilateral and bilateral economic and trade cooperation, and promote the common economic development and prosperity of the two countries, He said.

https://www.bignewsnetwork.com/news/274379160/senior-chinese-official-meets-saudi-finance-minister

>>20893089

You know it all breh but you never teach anything just statements.

You prove it every day with your responses that you cherry pick.

>we

Who is “We”spam neegar?

>been doing this for a long time

ask me if I care now

>>20893143

So triggered

Why would I read something I’ve read already?

>inb4 your next egomaniacal post

Bye

>>20893132

Copper at this level spins the narrative that economic growth is occurring.

That’s why it’s referred to as ‘Dr. Copper’

>>20893168

Shhh

Kek

On second thought it would be a good way to get rid of all the EVs in this state.

Like a rash here.

>>20893204

Oops

Like the SEC watching pron all day

Penny’s on the dollar for your “insured” account(s) at the FDIC.

>>20893225

>Ben Shap- HERO

No…just no

You haven’t understood his stance on many subjects if you call him a hero.

Wall Street strategists rush to revise their S&P 500 targets as stocks hit fresh records

(Of course as they still need to hand it off to retail traders so let’s just issue fresh guidance that sez “higher”-and it will probably get close too that’s how stoopid this has gotten, rallying on getting moar cheap money via cuts-they’ve used that excuse out long ago…nothing wrong with trading momo. But it’s so disconnected with any form of reality and has been for a while)

The stock market’s renewed record-setting rally has blindsided Wall Street’s top strategists, prompting many to swiftly revise their year-end S&P 500 targets in an effort to keep pace with a surge that has far exceeded expectations from earlier this year.

At least 11 Wall Street firms have lifted their year-end forecasts for the S&P 500 SPX so far in 2024. In the past week alone, BMO Capital Markets and Deutsche Bank revamped their 2024 targets for the large-cap benchmark index, raising them to 5,600 and 5,500, respectively. 

At 5,600 points, BMO’s new target appears to be the most bullish forecast among Wall Street’s biggest banks and research firms tracked by MarketWatch — implying an additional upside of more than 5% above Monday’s trading levels. Heading into 2024, Wall Street firms largely anticipated U.S. stocks to post positive yet underwhelming gains after a robust and forecast-defying 2023. Despite a brief dip in April, stocks have remained on an upward trajectory, with robust gains from megacap technology names driving the three major indexes to multiple all-time highs last week. The rally in May has also forced one of Wall Street’s most prominent bears to turn bullish and bump up his prediction of where equities will go next. Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, said he sees the S&P 500 climbing to 5,400 by the second quarter of 2025. While it’s not a direct comparison with the other banks’ year-end targets given the different timelines, Wilson’s previous 12-month forecast called for the S&P 500 to be down to 4,500 by the fourth quarter of this year. 

Wilson’s shift to a bullish stance on stocks leaves J.P. Morgan’s Dubravko Lakos-Bujas, the bank’s chief global equity strategist, as one of the very few bears left on Wall Street. J.P. Morgan in November set a year-end price target of 4,200 for the S&P 500, representing a potential downside of 21% from Monday’s levels. 

The revised estimates from strategists now put their average year-end target for the S&P 500 at 5,289, implying a decline of less than 1% from Monday’s levels, according to MarketWatch calculations. Heading into 2024, the average target was around 5,117. Not every bank has yet updated its price target for the S&P 500. Although some top strategists have been tweaking forecasts higher as the S&P 500 continues to surge, Wall Street in general has “pretty consistently maintained a dour outlook for the market” as the Federal Reserve’s interest-rate outlook remains uncertain, said Andrew Greenebaum, senior vice president of equity research product management at Jefferies. 

https://www.marketwatch.com/story/wall-street-strategists-rush-to-revise-their-s-p-500-targets-as-stocks-hit-fresh-records-heres-what-they-see-happening-cf55f033