The consecutive two-day plunge, is the US bond storm coming?

3020203Margin calls were increased, putting pressure on the repurchase market financing, causing the performance of spot bonds to lag behind futures - this situation is exactly the opposite of the profit logic of spread trading, causing huge losses for hedge funds.In response, the Federal Reserve has pledged to purchase tens of billions of dollars in government bonds to maintain market operations and provide emergency liquidity support to the repo market. Just last month, a group of financial experts recommended that the Federal Reserve consider establishing an emergency mechanism to automatically close highly leveraged hedge fund trades in future crises to stabilize the $29 trillion US Treasury market. Investors should be alert: the risk of drying up liquidity is imminent. Ed Al-Hussainy, the interest rate strategist at Columbia Threadneedle Investment, believes that the deleveraging process of basis trading has certainly played a role in recent days in pushing up long-term treasury yields. He pointed out that on Tuesday, the spread between the 30-year swap rate and the corresponding government bond had the largest single-day fluctuation in years, hitting a historical low. This is a sign that basis trading is being closed out on 30-year treasuries. Greg Peters, Co-Chief Investment Officer of PGIM's Fixed Income Department, summarized: "We saw such strong selling on Monday, and to some extent, it continued on Tuesday, fundamentally reflecting that the entire market is in a schizophrenic state." For investors, the most crucial thing now is to closely monitor market liquidity indicators and be prepared for possible larger fluctuations. This article is from "Wall Street See More", written by Zhu Xueying; GMTEight edition: Liu Xuan.