that investors endured earlier this year nearly took down an erstwhile safe part of the fixed-income market had the Fed not intervened.
Here's an example of how it works: if a bond becomes much cheaper than its relative futures contract, a trader can buy it through a repurchase agreement and then use a futures contract betting on its decline as collateral. If the bond's price comes in line with the futures contract, the trader profits. If not, the futures contract on other end of the trade wins.
Additionally, the belief that basis trading was safe led to a massive build-up in net-short positions against Treasuries. This meant that during the crisis, traders became saddled with huge bets against Treasuries that were never intended as bets against the asset class itself. In the waiting game to see what happened at an operational level, there were also risk-management concerns. If you acted too late, you would have been among the last out the door with far worse prices than if you de-levered early.
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Source: BusinessInsider - 🏆 729. / 51 Read more »
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