PMCCF
PELOTON MINERALS CORP
stockOTC

My theory is aligns more closely with your 2nd point—the basis trade by hedge funds—that’s not to say that your 1st point isn’t valid. The basis trade for dummies: scarred by the near-collapse of the financial system, policymakers moved to make banks safer. They demanded the lenders hold more capital against potential losses, and that they carry big buffers of high-quality assets that could be easily sold to raise emergency money (that included US Treasuries). The upside of all these measures was a safer banking system. The downside was shrinking bank balance sheets, diminished liquidity and risk-taking appetite in the banking system. It was harder and more expensive for big investors (clients) to borrow from the banks (broker-dealers). Without leverage, it was harder for clients to juice their returns. This was also a problem for the banks; less balance sheet means less room to effectively rent risk to investors - that meant fewer fees. But market participants are nothing if not creative (some might say they are a little too creative). And they found a fix for this problem: enter the basis trade. The trade allowed investors - primarily hedge funds and other active managers - to do two important things. The basis trade involves betting on the difference between prices of cash Treasuries and Treasury futures. To do this, they effectively go long the cash bond and short the synthetic futures contract. This cash bond purchase is financed through the vast repo market - where market participants get their wholesale funding and short-term liquidity by tapping those broker-dealers. The profit is the difference between prices paid for the cash bond and the simultaneous futures contract minus financing costs. Financing costs for US Treasuries - ostensibly one of the safest types of bonds out there - were pretty cheap! But as markets came crashing down in March 2020, the basis trade transformed into a problem instead of a solution. Suddenly renting out balance sheet to clients in this way didn’t look like such a great deal for banks. Sure, they were paid for this service, but they were in the process of de-risking and balance sheet was scarcer than ever. And so, banks rushed for the exit. And they did so all at once. This left hedge funds in a bit of a basis bother (say that three times fast). Sure, they could hold their positions until maturity, which would give them some breathing room to realize losses. But as banks ratcheted down risk en masse, they could no longer roll over their positions. They now had to liquidate their basis trades. To do this, they sold the cash Treasuries. With banks unable to warehouse additional inventory as they de-risked, the market hit an air pocket. Yields on the benchmark promptly 10-year spiked as investors shed their positions. The Treasury market crash was only halted when the Federal Reserve stepped in with a raft of measures to stabilize the bond market. It bought some $1 trillion worth of bonds in that period. It started buying corporate bonds. There was an alphabet soup of backstops: CPFF, MML, PMCCF, SMCCF, PDCF, PPLE, and MSLF. The list goes on. But basis trades aren’t the only things going on in bonds. Trump’s presidential win set in motion another dynamic: the expectation that banks would suddenly be free(er) from onerous regulatory requirements. This meant betting that cash Treasuries would outperform interest-rate swaps. Interest rate swaps allow investors to exchange fixed rates for floating rates. They are useful for hedging interest rate exposure. But as dreams of bank deregulation quickly began to die, they also meant that banks could warehouse risk (duration) without warehousing bonds on their balance sheets. The cost of borrowing on the repo market is still low but is beginning to tick upwards, that’s not necessarily a bad thing! A key function of central banks is providing liquidity. That’s why we’ve all been quoting Bagehot’s dictum for more than 150 years. Central banks should lend freely against good collateral - and US Treasuries are still the best form of collateral out there. But things really are different this time. News coming out of the White House is erratic. The US seems to be trying to divorce from the rest of the world. The economy is in a different place and the Fed might be thinking of policy trade-offs in a different way.