Office of Financial Research

Hedge funds held about $2 trillion of treasuries at the start of this year, more than double their holdings five years earlier.

according to the Treasury Department's Office of Financial Research, which said hedge funds controlled a record 7% of the market.

Data released by the Federal Reserve on Friday suggests that funds' Treasury holdings remain elevated, said Molly Brooks, a research strategist at TD Securities.

At least some of those holdings are the result of funds pursuing the basis trade, in which they capitalize on small price gaps between Treasury bonds and futures, borrowing money to try to amplify their gains.

That is the real fragility that you have to understand right now at this moment.

The Office of Financial Research said it pretty plainly.

If repo rates spike or margin requirements jump, those funds, those hedge funds, may be forced to unwind fast.

And you know what fast means for a hedge fund? real fast and a disorderly unwind of leverage basis trades could amplify volatility across the cash and futures markets.

So, sure, you could say this is just one index, right? There's then the LFR Financial Stress Index.

It was built by the Office of Financial Research inside the Treasury.

This one has 33 variables instead of the Bloomberg's eight.

Five categories, credit, equity valuation, funding, safe assets, liquidity, or excuse me, volatility, right? Two different indices measuring, angling to measure the same thing, different inputs, weights, methodology, but all pointing at the same conclusion, right? Conditions aren't just easy.