Matt Levine’s Money Stuff: The Synthetic Lender of Last Resort

People are worried about the basis trade

One dumb way to think about “the basis trade” is that asset managers want to borrow money to buy Treasury bonds, and asset managers want to lend money against Treasury bond collateral, and for some reason big hedge funds sit in the middle. The trade is:

1. A bond manager wants exposure to Treasury interest rates, but she does not want to just buy Treasuries, because that will take up too much of the cash that she wants to use to buy corporate bonds. So instead she buys Treasury futures, ...