A build-up of leveraged bets has the potential to “dislocate” trading in the $25tn US Treasuries market, the umbrella group for central banks said, the latest high-profile warning over the potential for crowded hedge fund bets to sow instability.
The Bank for International Settlements issued a warning in its quarterly report released on Monday about the growth of the so-called basis trade — whereby hedge funds seek to exploit the tiny differences between the prices of Treasury bonds and their equivalents in the futures market.
“The current build-up of leveraged short positions in US Treasury futures is a financial vulnerability worth monitoring because of the margin spirals it could potentially trigger,” the BIS said in the report, which focuses in particular on leverage used in the futures market to post margin.