A top Federal Reserve official has warned that a growing debt-fuelled trade hedge funds are making in Treasury markets could magnify instability in the world’s most important financial market.
Fed board governor Lisa Cook said on Thursday that funds’ so-called basis trades, which take advantage of tiny price discrepancies in Treasuries, risked making the $30tn market “more vulnerable to stress”, and in extreme cases could impact market functioning.
“Outside of episodes of stress, relative value trades substantially improve the efficiency and liquidity of Treasury securities and related markets,” said Cook, who is the governor responsible for financial stability. “Yet, during episodes of stress, the unwinding of crowded positions in such trades could magnify instability in these markets.”