Loading ...A very poignant read
(i) Many have talked/read about the manipulation in the gold market.
(ii) I, for one, have never really understood the “repo market” and the repo market crisis of September 2019.
This article gave me a perspective: if the Treasury market can be manipulated in this manner, manipulating the gold market severely pales in significance.
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“The hedge fund exploits the very tiny basis by purchasing a lot of the Treasury bills along with the futures contracts on the bills. The hedge fund then just holds on to the bills, and delivers them on the date they’re due, collecting a profit that is the basis price difference.
“This is where the repo market comes in. The profit margin on a basis trade was essentially guaranteed, but it’s small. To make the trade pay off, a hedge fund needs to make the trade thousands of times over. They used the repo market to pull this off. The hedge fund takes the Treasury bill, uses it as collateral, and gets the cash needed to load up on Treasury futures contracts. The hedge funds were able to lever up their bets by a factor of fifty to one, meaning every dollar they had allowed them to borrow fifty more dollars to use for trading. Ultimately, the hedge funds built a mutually reinforced tripod of debt and risk between Treasury bills, repo loans, and Treasury futures. It was easy money, like collecting millions of loose pennies off the sidewalk.”
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