- SEC and Federal Reserve officials have questioned prime brokers about leveraged trading in government bonds by hedge funds.
- The highly leveraged bond trade is spooking regulators as political brinkmanship around the debt ceiling threatens the US with default.
- Several hedge funds, including Citadel and Millennium Management, have recently pursued the so-called basis trade.
- The strategy involves borrowing heavily in the repurchase market to exploit the price gap between Treasury futures and the underlying cash market.
- Regulators are monitoring current margin requirements and how a default would impact the market plumbing.
Bloomberg — Markets — Hedge Fund Trade — Finance — Regulation — Investment
Infamous Hedge-Fund Trade Draws Fresh Scrutiny as Debt Battle Rages On
Regulators are scrutinizing hedge funds' highly leveraged bond trade known as basis trade, which has been popular with several hedge funds, including Citadel and Millennium Management, and is raising concerns due to the political brinkmanship around the US debt ceiling