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The Hidden Leverage Propping Up the Treasury Market
Is the Treasury market truly safe, or is it an unstable house of cards resting on a paper thin foundation?
While mainstream headlines focus on price action, the real story is in the data that Wall Street never reports, but I do— including where Primary Dealer leverage has hit extreme levels. I have been collecting, aggregating and reporting this data for the past 24 years, for Liquidity Trader subscribers.
My latest forensic analysis of the Fed’s Primary Dealer data reveals that dealer holdings have broken out to new all-time highs, but this growth is fueled by a dangerous dependence on repo financing and the hedge fund basis trade.
In this report, I expose the structural fragilities in the “House” (Primary Dealers) that put the markets at risk:
Extreme Leverage: The repo-to-holdings ratio is at all-time highs, signaling a market with zero buffer.
The Basis Trade Risk: Hedge fund short positions are now 15 times the size of dealer shorts. If this trade “blows up,” the Treasury market could unravel with terrifying speed.
The February Test: A massive wave of Treasury issuance is hitting the market next month. Can dealers—already stretched to their limits—absorb the supply, without market disruption?
Don’t wait for the market to break to find out where the risks are hidden. See the data and the charts that prove the market’s safety is a precarious illusion, based on the market makers’ extreme positioning.
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