February 2024

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The marginal buyer of US Treasuries (UST), including hedge funds in the basis trade, plays an important role in the 2024 market landscape. While the data show that overall leverage may be more muted in 2024 than in March 2020, the importance of the marginal buyer appears no less diminished and in some ways is even stronger than ever.

As marginal buyers have no obligation to stay in their trades and may unwind when conditions are unappealing, their behavior as a group can influence the direction of broader markets including government bonds, repo financing and even cash equities. An unwind could be the result of illiquid or wide spreads for UST, bank balance sheets that limit financing, or plumbing including access to infrastructure and central counterparties (CCPs).

This report is a quantitative and narrative look at the behavior of the marginal buyer of UST in 2024 as compared to other buying groups, and a review of the government and regulatory conditions that may prompt a review of UST liquidity, which in turn would impact marginal buyer behavior. While a short-term unwind could produce UST liquidity benefits as occurred in 2020, this may also generate broader concerns about investor confidence and market volatility. For those wondering if a UK-style LDI crisis could occur in the US, we think the answer is yes.

This report should be read by any market participant in the US Treasury and UST repo financing space. It should help investors, dealers and service providers plan for successful risk management in 2024.

Table of Contents

  • Executive Summary
  • Why the Marginal Buyer Matters
    • – Avoiding a Repeat of March 2020
  • The Current Behavior of Marginal Buyers
    • – The Fed’s Feedback Loop
  • Potential Impacts of Mandatory UST Repo Clearing
    • – Structural Concerns in the Rules
    • – And Behind Curtain #2
  • Qualifying the Risk
  • About Finadium LLC

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