Photographer: Elijah Nouvelage/Bloomberg LINK > https://www.bloomberg.com/opinion/articles/2020-07-20 Just a reminder from your friendly neighborhood former Federal Reserve Chairs: Hedge funds probably blew up the world’s biggest bond market in March and helped usher in unprecedented central bank action. Ben S. Bernanke and Janet Yellen, who combined led the Fed for more than a decade, delivered testimony last Friday to the House Select Subcommittee on the Coronavirus Crisis. Much of their remarks focused on the urgent need for Congress to take further fiscal action to offset the economic shock caused by the pandemic. However, in their writing on the Brookings Institution website, they also took some time to lay out their thoughts on steps taken by their successor, Jerome Powell, and his fellow central bankers . . . Now four months removed from the worst of the market chaos, it’s worth stepping back and remembering what exactly transpired . . . Any investor could be forgiven for not remembering that a little known trade popular among hedge funds, known as the cash-futures basis, was what set the U.S. Treasury market maelstrom into motion. . .
Something Snapped
March's extreme rally in Treasuries broke a popular hedge fund trade, forcing them to unload bonds into a strained market
The good news, for now, is there’s little evidence hedge funds are piling back into the trade. The Cayman Islands, seen as a proxy for all kinds of leveraged accounts, was a net seller of long-term U.S. Treasuries in April and May. It shed more than $100 billion of the securities in March, far and away the most in history. . . As Bernanke and Yellen pointed out, hedge funds would be a logical first place to look for answers. Once-in-a-century pandemic or not, Treasuries simply do not trade the way they did in March without something going haywire. Whether it was their intention or not, the former Fed chiefs deserve praise for bringing hedge-fund shenanigans back into the picture.
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