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The Treasury market faces growing fragility as Primary Dealers are forced to absorb a relentless supply of government debt. To manage this “deal with the devil,” dealers have turned to extreme financial engineering, ballooning their leverage through repo markets and complex hedging to keep prices stable. However, this mountain of offsetting long and short positions has created a precarious equilibrium; any sudden widening of the narrow gap between cash and futures markets could trigger a rapid, uncontrolled unraveling of hedges.
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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