"Federal Reserve Raises Concerns Over Hedge Funds' Leveraged Treasury Trades"
Hedge funds have likely increased their positions in highly leveraged Treasury basis trades, posing a risk to financial stability, according to a research paper published by the Federal Reserve. The need to unwind basis trades during the pandemic contributed to instability in the Treasury market. The Fed is aware that overtightening by withdrawing too much liquidity could cause an accident in the system. Hedge funds' short futures positions in Treasury contracts have increased significantly, presenting a financial stability vulnerability. Prompt intervention by the Fed in March 2020 helped mitigate the situation.