There is more than one Fed put.
Early this month, I wrote about the one that saved equity markets. It’s also one that backs the real economy and is the one that 99% of financial commentary is written about, particularly lately.
What worries me is the other one: It’s the call on the Fed or other central bankers to buy bonds when liquidity disappears. The most-forgotten moment of the pandemic was when Treasury yields shot higher as the fears peaked in March 2020. That went against everything the fundamentals were pointing to (and ultimately did).
That episode was symptomatic of a Treasury market with way too much leverage. It’s something that Zero Hedge writes about today: The basis trade. As they highlight, there is now a $1.1 trillion notional short position in US Treasury futures.
It’s a constant accident waiting to happen and no one in a position to do anything about it is going to act. We just all assume the Fed will be there to clean up the mess when it unwinds, as it partially did during the yen carry trade rout.
