The ‘very dangerous’ $1 trillion bet ringing alarm bells in Britain
The TelegraphHouse of cards Hedge funds have built up complex trades worth more than $1 trillion based on US debt, funded by borrowing short-term from banks and selling to pension funds. Hedge funds buy US debt – known as treasuries – and then sell futures contracts based on that debt to investors such as pension funds at a slightly higher price. “Of course nobody knows how many times the same treasury bond is repoed.” Hedge funds had more than $550bn in treasury trades that were backed by just $10bn of their own cash at the end of 2023, research by the Federal Reserve has found. While not exactly the same, risks from the hedge fund basis trade have drawn comparisons to the liability-driven investment crisis that nearly toppled pension funds in the wake of the mini-Budget.
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