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Another government-sanctioned market manipulation that has enriched the very few?
Two months ago GATA issued a report by our consultant Robert Lambourne highlighting that the "basis trade" being undertaken by certain hedge funds in the U.S. Treasuries market and Treasuries futures market was apparently linked in terms of timing and magnitude to the program of "quantitative tightening" being carried out by the Federal Reserve:
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The GATA report on these trades concludes:
"The possibility that U.S. monetary authorities have tacitly engineered and supported a policy of encouraging what regulators, including the Fed itself, consider to be a risky trade with hedge funds holding highly leveraged short positions in Treasury futures is perhaps a reason to query whether U.S. Treasury bonds represent the safest investment category globally. The answer perhaps depends on whether the chart reveals a strange coincidence or is a sign of an effort to ease the passage of QT.”
Any reader interested in this conclusion is invited to read the full GATA report of October 22 to understand the reasons for this conclusion and especially the remarks provided by the artificial intelligence source ChatGPT about the likelihood that a profitable basis trade would be feasible for such a long time.
If the hedge fund basis trade was part of an effort to ease the passage of QT, then the contention that the basis trade is winding down may be an indicator that QT is ending or being wound down itself.
The Fed and Treasury often work through big banks, and the hedge funds undertaking the basis trade in Treasuries are reported to have done so by borrowing huge amounts from big banks. Hedge funds have a long record of overextending themselves. So would those banks have lent so much to the hedge funds in the basis trade if the Fed and Treasury objected to such fiddling in the Treasuries market? Indeed, might such loans have been made in large part because they had the approval or encouragement of the government?
If, as seems very possible, the fantastic profits made by the hedge funds involved in the basis trade arose largely from explicit or tacit cooperation with the Federal Reserve or the Treasury Department or both to get QT done, the U.S. financial system and the government agencies running it would be rigging markets and corrupt and deceptive in still another way.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
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