Hedge fund bets on falling U.S. Treasury prices could be putting the stability of the global financial system in a precarious position, according to the Bank of England.
Per MarketWatch, the BOE is seeing outsized short positions on Treasury securities rising to levels not seen since 2018. The common notion is that traders might be sensing that yields will rise as investors gravitate from the safety of bonds to riskier securities. However, that’s not the case.
The MarketWatch report noted that traders are looking to exploit price discrepancies between cash bonds and Treasury futures via bonds or swaps. In order to extract the most returns, these trades are highly leveraged. So, the smallest market movement could make for strong gains or, in the worst case scenario, catastrophic losses.
That was the case in the early going of 2020 when market panic hit amid the COVID-19 pandemic. Now, the BOE is seeing similar activity.
“For instance, over recent months, leveraged hedge funds have built up large positions in U.S. Treasury futures, which market intelligence suggests are relative to bonds or swaps. If these markets were to move sharply, deleveraging these positions could further amplify stress,” the BOE said. “These risks, and other underlying vulnerabilities in the system of MBF…remain largely unaddressed and could resurface rapidly. In particular, the sharp transition to higher interest rates and currently high volatility increases the likelihood that MBF vulnerabilities crystallise and pose risks to financial stability.”
Tail Hedge Funds With These 2 ETFs
If hedge fund bets are right, traders — particularly of the bearish variety — can use inverse exchange traded funds (ETFs) from Direxion Investments. For Treasury notes, consider using the Direxion Daily 20+ Yr Trsy Bear 3X ETF (TMV) and the Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO).
TMV seeks daily investment results before fees and expenses of 300% of the inverse of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The index is market value-weighted and includes publicly issued U.S. Treasury debt securities that have a remaining maturity of greater than 20 years.
TYO seeks daily investment results before fees and expenses of 300% of the inverse (or opposite) of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. The index is a market value-weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to 10 years.
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