Column-U.S. Treasury futures in unchartered waters as Fed cuts loom: McGeever
ORLANDO, Florida - As the first U.S. interest rate cut in this cycle draws closer, long and short positions in the Treasury futures market, and overnight repo lending volumes, have never been higher.
On one side of the trade, asset managers, pension funds and institutional investors are hoovering up risk-free government bonds to lock into attractive yields before they start falling in tandem with the policy rate. They do this by going 'long' bonds in the liquid Treasury futures market. While this is a dog that hasn't barked, far less bitten, the numbers involved now are eye-watering, in nominal and relative terms.
"Repo volumes are surging. This tells me that this is a resurgence of the basis trade," says Joseph Wang, chief investment officer at Monetary Macro and a former senior trader on the Fed's open markets desk.Trillion dollar positions, especially highly leveraged ones, are obviously a potential worry. But they can stay large without issue as long as parties on both sides of the trade remain comfortable.
Can we expect this positioning to become even more extreme? That depends on the nature of the Fed's easing cycle - falling rates can sustain the basis trade but rapid and large declines may trigger a disorderly unwind "Today confirmed that status, and consequently can be seen as supporting the recent trend of persistent flows out of cash into longer-dated fixed income assets," Rieder wrote in a client note on Wednesday.
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