OFR: hedge fund activities can influence UST yield curve

The March 2020 stress on the US Treasury market raised questions about the role of hedge funds in the financial system and whether their activities can increase systemic risk. Using a sample of regulatory hedge fund data that spanned eight years, recent research from the US Office of Financial Research found that hedge funds play a significant and consistent role in influencing the US Treasury yield curve alongside other market players and forces.

In March 2020, a steep flight to the safest, most liquid assets led to Treasury market volatility that widened the Treasury cash-futures basis, the price difference between cash Treasury securities and futures contracts on similar securities. While relative value hedge funds try to profit off of temporary differences on similarly yielding securities, the widening forced a number of these funds to unwind their positions, causing additional market instability.

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