Fed economists sound alarm on hedge funds gaming US Treasuries

[Nighthawk]

NEW YORK, Sept 13 (Reuters) - Researchers at the Federal Reserve have issued warnings in recent weeks about possible disruptions in U.S. Treasuries due to the return of a popular hedge fund trading strategy that exacerbated a crash in the world's biggest bond market in 2020.

Hedge funds' short positions in some Treasuries futures - contracts for the purchase and sale of bonds for future delivery - have recently hit record highs as part of so-called basis trades, which take advantage of the premium of futures contracts over the price of the underlying bonds, analysts have said.

https://www.reuters.com/markets/us/...-hedge-funds-gaming-us-treasuries-2023-09-13/

Guess, who is buying ATM Treasury call options? Bloodbath is just a matter of time.

It´s always the same with these "herd trades" = the last will be paying the bill. But usually, most of the hedgies don´t see it even coming. Greed is good!

 

[murray t turtle]

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US debt \ debt problems\downgrade problem.WHO would have figured
Another fair question, why did it take so long to downgrade US debt some years ago??
On a more positive note ..better than\ chicom control freaks debt \russian evil empire debt default/LOL..................................................................................................

 

[Specterx]

I’ve been eyeing a long bonds trade. Sounds like there’s a lot of rocket fuel laying around in the market should futures begin to rally..

 

[Real Money]

What about buying like 10,000 shares TMF. Triple leveraged, and the shares are less than $6 now. In 2-3 years these shares could be trading like > $9.

What's the risk with this instrument on that kind of timeframe?

 

[David's faith]

What about buying like 10,000 shares TMF. Triple leveraged, and the shares are less than $6 now. In 2-3 years these shares could be trading like > $9.

What's the risk with this instrument on that kind of timeframe?

US bankruptcy. Unlikely yet not impossible given the debt to GDP

 

[piezoe]

%%
US debt \ debt problems\downgrade problem.WHO would have figured
Another fair question, why did it take so long to downgrade US debt some years ago??
On a more positive note ..better than\ chicom control freaks debt \russian evil empire debt default/LOL..................................................................................................

The real problem is not debt but failure to tax. This may sound strange to anyone who does not understand sovereign fiat money. Those who do understand it realize that there is no real debt, since the money to retire 100% of outstanding U.S. bonds has already been printed before the associated bond is auctioned and returned to the Treasury simultaneously with the auction. The money the Government spends in deficit is always printed; never borrowed. Bonds serve an entirely different purpose than the raising of money to spend!

The problem is bond servicing, which is a drain on the non-discretionary Federal budget, and in event of failure to tax appropriately leads to further issuance of bonds. Taken together this constitutes a positive feed back in the overall bond issuance cycle. By far the best way to rein in this feedback is to both spend and tax appropriately. Spending on investment does not need to be reined in, but merely appropriately vetted. In fact, failure to spend on investment can exacerbate the longer term problem. Unnecessary non-investment spending, especially on wasting assets, is a primary place to look for savings, as is efficiency in government operations. And here one should look first at the least efficient government operations and at insufficiently justified government subsidies. Subsidies should pay for themselves in savings elsewhere, or be justified as true investment.

There is no risk of default on U.S. Government issued securities other than that voluntarily caused by inept politicians. The only real risks are inflation and sociopolitical risks; thus any downgrade based on default risk is nonsense. Failure to tax, however, not only exacerbates future inflation risk but also entails sociopolitical risks. W. Randall Wray has observed that most hyperinflations have been due to a breakdown in the tax system. After long reflection on this issue, I am inclined to agree.

 

[nitrene]

Yes taxing is the problem. Why don't you try to run for President on the "We will tax everyone more" platform and see if that gets you elected. You live in GaGa Land.

 

[murray t turtle]

[ corrected QUOTE="piezoe, post: 5866272, member: 45984"]The real problem is .........debt Unnecessary non-investment spending, especially on wasting assets, is a primary place to look for savings....[/QUOTE]
%%
Good points;
I corrected your quote \I seldom quote errors on purpose
I live in one of 7 no tax income states ; they also gave us a 60 day tax cut on food, most likely they wanted to help sell more , good idea with tax cut.
Frankly mr Piezone if you think high taxes are so good give all you want to US Treasury\they need it + cut spending=LOL..............................................

 

[piezoe]

Yes taxing is the problem. Why don't you try to run for President on the "We will tax everyone more" platform and see if that gets you elected. You live in GaGa Land.

You are joking of course. When economists speak of a failure to tax they are never blindly advocating taxing everyone more. Taxing must be nuanced or the economy will be wrecked!

Some may require taxing less and others more. One very obvious defect in the present tax structure is the collapsing of brackets in the income tax experienced since 1981. This has been a prime contributor to the piling up of wealth all at one end of the wealth spectrum.* It threatens to destroy our democracy.

It's obvious to all of us, you included of course, why there is a failure to tax. As we all know, in the past we have had two main political parties in the U.S. Although no politician happily campaigns on a platform calling for more tax revenue, one of parties (now a former party) has for many years championed low taxes at the same time that its policies produced the largest deficits. Deficits are produced by a combination of too much spending and too little taxation.

This record is incompatible with sound money management. The government never borrows to raise money to spend but instead always prints what it needs in addition to its tax revenue. This results in new money entering the economy. If the rate at which new money enters the economy is greater than the rate at which productivity of goods and services for sale increases, the result is usually inflation. To prevent inflation, the Treasury, subsequent to deficit spending, issues bonds which convert new money in transactional form to its non-transactional equivalent, i.e., bonds. (Bonds are not part of the "Money Supply" but are a part of total private sector money.)

The Fed regulates the amount of transactional money, i.e., the money supply, to keep it in balance with the amount of goods and services available for purchase. They do this by buying and selling Treasury bonds. This does not change the overall amount of money in the economy but simply alters the ratio of money's two forms: transactional and non-transactional. (total money in the economy = transactional money + bonds)

Taxes are the means by which the government reduces the total amount of money in the economy and hence the government's most powerful anti-inflation tool. However this tool is denied to the Fed, as only Congress can wield it.

I explained in my earlier post above what some economists believe will be the eventual effect of failure to tax sufficiently, and why.
__________________
* This, according to Pikkety, is, in capitalist economies, an unavoidable consequence of return on capital being greater than overall growth of the economy. Taxation, when wisely structured can modulate the rate at which wealth disparity grows; thus serve to stabilize and strengthen democracies. .

 

[leonel]

The real problem is not debt but failure to tax. This may sound strange to anyone who does not understand sovereign fiat money. Those who do understand it realize that there is no real debt, since the money to retire 100% of outstanding U.S. bonds has already been printed before the associated bond is auctioned and returned to the Treasury simultaneously with the auction. The money the Government spends in deficit is always printed; never borrowed. Bonds serve an entirely different purpose than the raising of money to spend!

The problem is bond servicing, which is a drain on the non-discretionary Federal budget, and in event of failure to tax appropriately leads to further issuance of bonds. Taken together this constitutes a positive feed back in the overall bond issuance cycle. By far the best way to rein in this feedback is to both spend and tax appropriately. Spending on investment does not need to be reined in, but merely appropriately vetted. In fact, failure to spend on investment can exacerbate the longer term problem. Unnecessary non-investment spending, especially on wasting assets, is a primary place to look for savings, as is efficiency in government operations. And here one should look first at the least efficient government operations and at insufficiently justified government subsidies. Subsidies should pay for themselves in savings elsewhere, or be justified as true investment.

There is no risk of default on U.S. Government issued securities other than that voluntarily caused by inept politicians. The only real risks are inflation and sociopolitical risks; thus any downgrade based on default risk is nonsense. Failure to tax, however, not only exacerbates future inflation risk but also entails sociopolitical risks. W. Randall Wray has observed that most hyperinflations have been due to a breakdown in the tax system. After long reflection on this issue, I am inclined to agree.

Exactly!! well said!