Fed Urged to Explore Hedge Fund Bailout Tool for Basis Trade

The Federal Reserve should consider setting up an emergency program that would close out highly leveraged hedge-fund trades in the event of a crisis in the $29 trillion US Treasuries market, according to a panel of financial experts.

Any vicious unwinding of a swath of the estimated $1 trillion in hedge fund arbitrage bets would not only hamper the Treasuries market, but others as well — requiring Fed intervention to assure financial stability. When the US central bank did that in March 2020, during the initial Covid crisis, it engaged in massive outright purchases of Treasury securities, to the tune of about $1.6 trillion over several weeks.