The Federal Reserve’s top banking regulator on Thursday joined a chorus of US officials expressing concern about highly leveraged trading by hedge funds in the Treasury market.
A slew of central bank officials and other regulators are set to speak across the country on Thursday, including at the New York Fed’s ninth annual Treasury Market Conference, which this year will explore issues including market resilience, liquidity and the future of the Treasury cash market.
The conference, also co-hosted by the Fed, Treasury Department, Securities and Exchange Commission and Commodity Futures Trading Commission, will feature remarks from Fed Vice Chair Michael Barr and Treasury Undersecretary Nellie Liang, as well as other senior New York Fed officials and regulators.
(All times are NY)
Barr Joins Chorus Warning About Hedge Funds’ Basis Trades (10:35 a.m. NY)
Michael Barr, the Fed’s vice chair for supervision, said the government needed more information about highly leveraged trading by hedge funds in the Treasury market. Over the past several months, regulators have been homing in on risks that could stem from one strategy known as the basis trade, which involves the use of leverage to profit from the price gap between Treasury futures and the underlying cash market.
Read More: US Weighs Leaning on Banks to Curb Hedge Fund Leveraged Trading
Leveraged trading, including in the so-called basis trade, can play an important role in capital markets and can bolster market efficiency, Barr said in remarks prepared for a New York Fed conference on the Treasury market. “But leverage can also increase risks to both market participants and to Treasury market functioning and must be managed appropriately by both investors and their counterparties, including through collecting margin to manage counterparty risk,” he said.
NY Fed’s Williams, Neal Call for Greater Data Transparency (9:25 a.m. NY)
New York Fed officials called for greater transparency and understanding of financial-market data at the bank’s 2023 US Treasury Market Conference.
“We must continue to work together to increase data transparency and understanding, so that we can have greater market confidence and make better decisions,” President John Williams said in prepared remarks. (Williams didn’t comment on his outlook for interest rates or the economy.)
Separately, Michelle Neal, head of the New York Fed’s markets group, said greater transparency into Treasury market activity will support its many roles as a risk-free benchmark for financial instruments. Looking ahead, conference participants should consider whether to take additional steps toward increased transaction transparency across the Treasury universe, especially for less liquid segments of the market, such as off-the-runs, she said.
“The off-the-run market was the center of much of the dash-for-cash selling of Treasuries that occurred in March 2020, yet there is little data on off-the-run trading available to the public, making it challenging for academics and others to study such stress events in detail,” Neal said.
Mester Says 2% Inflation Will Take Time (9:23 a.m. NY)
Cleveland Fed President Loretta Mester said that while inflation has cooled, it’ll take time for it to fully return to the central bank’s 2% target.
“Inflation has been running well above the Fed’s goal for more than two years and while it’s still above our 2% goal, there’s been discernible progress on inflation even while the overall economy has remained relatively strong,” Mester said Thursday in opening remarks at the bank’s Financial Stability Conference. “It’s going to take some time to get inflation back down to 2%.”
The Fed has one policy meeting left this year, in December, and officials are assessing economic conditions to see whether further interest-rate increases are needed.
If the economy evolves differently than expected “monetary policy is going to need to be nimble and respond appropriately to evolving outlook and risks to achieving both parts of our dual mandate. I believe the current level of the funds rate positions us well to do just that,” Mester said.
--With assistance from Catarina Saraiva, Alexandra Harris, Jonnelle Marte and Katanga Johnson.
(Updates with Barr remarks in fourth paragraph.)
