- 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.
Infamous Hedge-Fund Trade Draws Fresh Scrutiny as Debt Battle Rages On
A highly leveraged bond trade that’s become popular with hedge funds is drawing fresh scrutiny three years after it blew up spectacularly.
Sonali Basak
