Economist covering repo, Treasuries, money markets: markets that work quietly but fail loudly. Views my own.
Washington, DC
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Why is it hard to pin down the "right" size for a central bank's balance sheet?
Our note breaks down the tradeoffs involved. 👇
Our latest FEDS Note offers a new lens for focusing on the tradeoffs involved in setting the size of central bank balance sheets:
The central bank balance-sheet trilemma
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Jay Kahn retweeted
In today's post, the authors show that trading in U.S. Treasury securities is becoming more concentrated around the designated pricing, or “strike,” times for fixed-income indexes. The concentration is especially pronounced on month-end trading days. nyfed.org/4cWqSfH
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Ellen's thoughts in this interview with @DavidBeckworth are very worth a listen: mercatus.org/macro-musings/e…
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New #IFDPPaper: Estimating Yield Impacts of Treasury Demand and Supply Changes: federalreserve.gov/econres/i… #EconTwitter
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Agree the doom and gloom on the basis trade goes too far, BUT:
1) The basis trade is NOT the swap spread trade. April 2025 was mostly about swap spreads.
2) Demand for leveraged duration IS how growing Treasury supply gets absorbed. So the two are intimately related.
A rant on the shiniest object "The Basis trade of doom" in my blog post in comments. Everything people are telling you about the basis trade is wrong.
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3) Finally (and I hope this is the last time I have to say this) the other side of the basis trade is NOT insurance companies or pension funds, it's largely mutual funds and SMAs.
1/🧵 We just put out a new paper putting numbers to a mystery I've been working on since 2020: who is behind the almost $2 trillion increase in long Treasury futures positions?
Spoiler alert: it's mostly mutual funds but the cool thing is why.
Link here: papers.ssrn.com/sol3/papers.…
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This last point is important because it goes back to 2): One reason asset managers are demanding more long futures is *because* increasingly Treasury supply is driving up the duration of the agg benchmark.
5/🧵 The Bloomberg US Aggregate Index is a particularly popular choice. The share of Treasuries in the Agg has grown over time as Treasuries have begun to make up a larger share of outstanding debt
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I would love to stop writing about the basis trade but we do need to get this right.
Pension funds pulling back is *not* causing the rise in hedge fund Treasury holdings...
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... because what you would need absent hedge funds is actually a big *increase* in pension allocations towards Treasuries.
Issuance has simply been outpacing AUMs.
So even if there was *no* pullback you'd still need new holders to absorb the flow.
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This may be true for the EU, but as @dismalscience and I point out, in the U.S. main driver may simply be the rapid growth of outstanding Treasuries relative to real money AUM.
Why are hedge funds now absorbing a much bigger share of issuance in sovereign bond markets in the US, the Eurozone and elsewhere? Because a decade of QE (and low yields) permanently changed the nature of financial intermediation, and hence the portfolios of insurance companies, pension funds and other financial intermediaries who were traditional buyers of long-dated government bonds.
Terrific work on this topic by @matteoleombroni together with Ciaran, Philippe and Stelios.🧵
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Here's the article: dallasfed.org/research/econo…
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Thoughts from @stwill1 on this are *always* worth a deep read.
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We have an answer to this question. The mutual funds that make up longs in Treasury positions *do* want duration, and use futures to conserve balance sheet. nitter.net/jstatistic/status/1786…
They don't use swaps because they are a pain, other investors do.
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The OFR just put out a new brief on what we've learned about NCCBR since the collection started.
Three things that leap out at me:
1) We knew the hedge fund piece would be big and it *is*, but the interaffiliate chunk is also way larger than initially expected.
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Full note here: financialresearch.gov/briefs…
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