Lots More with Matt Levine and Mike Mackenzie

Basis Trade

The treasury futures basis trade involves buying treasuries and selling the associated futures contract to pocket the spread between them. Matt Levine explains that this trade is typically leveraged by hedge funds to amplify the minuscule spread, which can lead to volatility in the market during times of financial stress 1. Tracy Alloway adds that the basis trade blew up in March 2020 due to unexpected interest rate volatility, causing a self-reinforcing loop of treasury dumping until the Fed intervened 1. Levine notes that the trade exists because it provides an efficient way for long-only bond managers to gain exposure to treasuries 1.

The great meta story of financial media is everyone overlearns the lessons of the last crisis and is like, oh, this blew up once, it'll blow up again. But actually a different thing always blows up again.

--- Matt Levine

Alloway reflects on the media attention the basis trade has received, emphasizing that while concerns persist, the market conditions have changed since 2020 2.

   

Bond Liquidity

Bond market liquidity has been a significant concern, especially as banks have retreated from providing balance sheets, leaving high-frequency traders to fill the gap. Levine highlights that despite fears, the modern system of treasury intermediation has proven resilient even in volatile environments 3. Alloway recalls the market's reaction in March 2020, when the Fed's announcement of a corporate bond-buying program calmed the market without significant purchases 3.

People are worried about bond market liquidity. They really were.

--- Tracy Alloway

Mike Mackenzie shares his experience as a swaps broker in Tokyo during the 1990s, noting the dramatic market movements and the importance of liquidity during financial crises 4.

   

Credit Influence

The rise of private equity and their internal credit funds has significantly altered the credit market landscape. Mike Mackenzie argues that private equity's involvement reduces the likelihood of a credit blow-up, as they possess extensive information and resources 5. Alloway notes that private equity firms do not have to mark to market as frequently, creating an illusion of liquidity 5.

Private equity is now the big player in credit.

--- Mike Mackenzie

This shift in market dynamics has led to a more stable credit environment, with private equity firms holding a significant amount of dry powder ready to deploy during market downturns 5.