Margin calls are the likely culprit behind a slump in Treasury futures that sunk a popular hedge fund trade in recent weeks. Funds who had been making highly-leveraged bets on price moves between Treasury futures and bonds saw their positions collapse when investors hit with margin calls sold the contracts.
Some of the recent dollar strength may also have been driven by margin demands. South Korean brokerages who hedge their exposure to structured products with dollar-denominated derivatives positions are facing calls, forcing them to scoop up dollars. In gold, investors liquidating bullion holdings to raise cash have been blamed for the metal’s epic slump.
Wild moves reign among risky assets like corporate bonds and oil -- opening up the possibility of more margin stress.
“Half the people we talk to think the current environment is worse than the financial crisis,” the Wells Fargo strategists wrote.
The Volcker Rule was designed to cut banks out of the shadow banking sector. Instead it created an additional step between how shadow banks can access liquidity and the central bank. Since banks were unable to go after the most lucrative leveraged trades, they instead provided macro hedge funds with the capital required to pursue these strategies.Click HERE to subscribe to Fuller Treacy Money Back to top