ECB Flags Basis Trade Risks in Europe’s Government Bond Market
- Central bank notes a ‘build-up of hedge fund exposure’
- Similar strategy has come under regulatory scrutiny in the US
The European Central Bank headquarters in Frankfurt, Germany.
Photographer: Alex Kraus/BloombergThis article is for subscribers only.
A leveraged trade that’s worrying regulators worldwide has caught the attention of the European Central Bank, which pointed to signs the strategy is gaining traction in the region.
The ECB noted a group of offshore hedge funds has become increasingly present in Europe’s government bond repo market, suggesting growing use of the so-called basis trade. The strategy, which looks to exploit price differences between futures and bonds, has come under scrutiny in the US after it contributed to market turmoil at the start of the pandemic in 2020.