Bailed-out basis traders face regulatory backlash
By Robert Mackenzie Smith
October 28, 2020, Risk
For many fixed income traders, the defining market event of the Covid-19 crisis was the mass unwinding of bond/futures basis trades by levered hedge funds, which sent shockwaves through an already glutted US Treasury market in March.
The sudden surge in volatility upended the arbitrage between bonds and futures and triggered margin calls on a scale not seen in a decade. As hedge funds rushed for the exits, bid-ask spreads in off-the-run US Treasuries, which are typically a fraction of a basis point, shot up to as much as 3bp in the 30-year bond. On March 15, the US Federal Reserve announced it would purchase $500 billion of government bonds to restore market functioning.
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