Central bank body warns hedge fund bets risk dislocating US Treasury market

‘Financial vulnerability worth monitoring’

The Bank for International Settlements has warned the current build-up of leveraged short positions in US Treasury futures is a “financial vulnerability worth monitoring”.

In its quarterly review report published today (18 September), the umbrella group for central banks issued a warning about the growth of ‘basis trade', a hedge fund strategy in which investors attempt to profit from small price discrepancies between Treasury bonds and their futures market equivalents. According to the BIS, leveraged funds have built up net short positions in US Treasury futures of around $600m in recent months, with more than 40% of the net shorts concentrated in two-year contracts.  These funds had been at comparable level of net shorts in the run-up to the repo mark...