Hedge funds are exploiting a shadowy trade to cash in on the debt crisis and the SEC and Fed are questioning prime brokers, sources say
A highly leveraged bond trade that’s become popular with hedge funds is drawing fresh scrutiny three years after it blew up spectacularly.
Officials at the Securities and Exchange Commission and the Federal Reserve have questioned prime brokers about leveraged trading in government bonds by their fast-money clients, according to people familiar with the matter, who asked not to be named citing the confidential nature of discussions. The dangers have been heightened as political brinkmanship around the debt ceiling has threatened to sink the US into default and unleash chaos in financial markets.
Several of the hedge funds that have recently pursued the so-called basis trade were also active in 2020, when the outbreak of the pandemic upended the Treasury market and caught them wrong-footed until Fed officials intervened to restore normalcy. The list includes Citadel, Millennium Management, ExodusPoint Capital Management and Capula Investment Management, according to people familiar with the matter.
Opaque and risky, the strategy has long spooked watchdogs. It involves borrowing heavily in the repurchase market and using that leverage to exploit the price gap between Treasury futures and the underlying cash market. The trades, in some cases, have been levered 50-to-1, according to two of the people. The strategy’s enduring popularity is particularly alarming to SEC Chair Gary Gensler, who is on a broader mission to subject large speculators to more onerous regulations.
“There’s a risk in our capital markets today about the availability of relatively low margin — or even zero margin — funding to large, macro hedge funds,” said Gensler, in response to a Bloomberg News inquiry about the rise of the investing style.
The New York Fed said in a statement that it “regularly reaches out to a wide range of market participants to gather information on financial market developments, and this outreach is consistent with typical market intelligence gathering.”
Officials have been asking about current margin requirements and how a default, or a downgrade to the US’s credit rating, would impact the market plumbing including the value of collateral, the people said.
The regulatory interest in the issue isn’t entirely new — some officials have been monitoring it ever since the last blow-up — but the possibility of a US default has added a new, and troubling, element. Financial watchdogs are under pressure after having been blindsided repeatedly by instability in the bond market since the pandemic erupted.
Fed officials at the policy meeting earlier this month expressed concerns about the risks lurking outside the banking system in light of recent financial stresses. Minutes released Wednesday singled out “hedge funds, which tend to use substantial leverage and may hold concentrated positions in some assets with low or zero margin.”
Memories of the 2020 rout are fresh. Back then, massive volatility in Treasury futures sparked margin calls and contributed to the Fed’s decision to pledge trillions in stimulus. ExodusPoint and Capula were caught out while Millennium closed several so-called trading pods in the crisis. For Citadel, the impact was smaller. The firm’s current positioning in the trade isn’t the largest it’s been historically, one of the people said.
Representatives for Citadel, Millennium, ExodusPoint and Capula declined to comment on their current exposures.
This time round, the build-up in short-futures positions by funds that use leverage has been hitting records. That’s a sign speculators are seeking to profit from a mismatch in pricing between Treasury futures and the cash market. Since the strategy typically yields minuscule returns, hedge funds borrow in the repo market to amplify gains.
A big bulk of such trades are conducted on a bilateral basis — meaning transactions take place between two firms without a central clearinghouse serving as a backstop. The Treasury’s Office of Financial Research has said it considers bilateral repo, the most common of all repurchase activities, as a regulatory blindspot. Post-2008 bank rules have also made repo activity more costly and less attractive to dealers — giving life to new market players who largely operate outside the reach of financial supervisors.
The SEC has been seeking to push more hedge-fund Treasury trades into central clearinghouses. The agency also finalized a rule that would require private funds to report major losses, sudden margin increases, or other significant events within no more than 72 hours — or potentially sooner. But that regulation won’t go into effect for six months.
Meanwhile, the clock is ticking for debt negotiators in Washington. Traders assume that if push comes to shove, the Treasury would prioritize interest and principal payments on publicly held obligations. Yet even if there’s an 11th-hour agreement, prolonged fiscal brinkmanship could cause a surge in repo rates — and undermine one-way trades across a bond market that’s delivered blows to a host of money managers over the past year, while fueling the regional banking crisis.
To be clear, not everyone finds positioning in the bond market alarming. To Meghan Swiber, a US rates strategist at Bank of America Corp., hedge funds typically take the other side of the trade when asset managers amass massive long positions in futures. And to hedge themselves, the fast money goes on to buy obligations in the cash market, which helps at a time when the Fed is shrinking its bond portfolio, per Swiber.
“The asset manager community has seen such large demand for Treasuries that someone’s got to supply those asset managers liquidity,” she said.

🇺🇦 Слава Україні! 🇺🇦

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Another entry in our series on Ukrainian cuisine! Previous entries:
Borshch Varenyky Salo Syrniki Korovai Horilka Pampushky Banosh Hrechanyky Kyivskyi Cake Makivnyk Vyshnyak Drunken Cherry Cake Varenukha Pumpkin Porridge Lazy Varenyky Holubtsi Kolach Kvas Christmas Borshch Uzvar Kutya Beetroot Salad Kapusnyak Nalysnyk Bublyk Deruny Wild Mushroom Sauce Yavorivskyi Pie Spring Dough Birds Kholodets Easter Bread (Babka/Paska) Khrin & Tsvikli Shpundra Teterya Green Borshch Kalatusha Elderflower Kvas Crimean Tatar Chebureky
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Ryazhanka

Ryazhanka made using a mason jar method. Photo: New York Times.
Today we will cover a drink that is not so internationally popular (yet!) but has potential for crossover stardom. It’s called Ryazhanka, and for many Ukrainians, it's a staple found in the refrigerator year-round. If you visit a Ukrainian store, you will likely find no shortage of brands that aim to dazzle you with their hearty yet refreshing drink.
Ryazhanka is a baked cultured milk drink that is traditional in Ukraine and Belarus. Its taste is sweet and super creamy and not quite sour - the tanginess from the fermentation gives it just a little kick.
It's also a very old drink. It is well recorded that during the era of Kyivan Rus, people made Ryazhanka in the Pich (the traditional Ukrainian oven). They would heat up milk and cream at high temperatures (but without bringing to a full boil!) until they acquired a nice caramelized color.
While on some level I do believe that our old pal Domovyk must of course be involved in the process of crafting Ryazhanka, I have also read in some sciencey places that during the baking process, milk proteins interact with the sugars in milk resulting in the formation of a new substance - melanoidins. Maybe Domovyk’s powers include control over high molecular weight heterogeneous polymers. :) Anyway, just like some other cooked dairy products (like ultra-pasteurized milk or ghee), melanoidins seem happy to provide the unique color of Ryazhanka. And of course, they impart a quite pleasant taste! To seal the deal, a little sour cream was traditionally added to the Ryazhanka after baking and with time the milk would ferment, adding another interesting element to the drink.
This stabilized drink of course allowed humans to preserve milk for a little longer before it went bad when civilization had not come up with refrigerators just yet; if you’ve been following this series, you’ll understand that Ukrainian cuisine is all about fermentation and preservation! And it's also worth mentioning that in a pinch, the rich and nutritious Ryazhanka could be a substitute for a meal, especially on a hot day, adding to its appeal.
Note: I am positive that you can find Ukrainian Ryazhanka in stores that carry brands from Eastern Europe, although I want to mention that regretfully the orcs developed their own knockoff brands so be careful and look for the country of origin on the label! And as we do not want you to support the war machine or get poisoned (are you sure Novichok is only in tea?), we’ll tell you how to make it at home!
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How to Make Ryazhanka (With or Without Domovyk’s Help)

To prepare Ryazhanka, you will need only two ingredients!
Ingredients

• Milk (full fat, as fresh as possible) - 3 Liters
• Plain whole milk Kefir - 4 Tbsp
  • Note: It is traditional to use sour cream, but I worry that for the purposes of this recipe all international sour cream might not have the right cultures in it to be able to kick off the process, whereas Kefir probably does. Substitute same volume for sour cream or you could try full fat active culture Greek Yogurt.

Recipe

1. When fermenting, it’s really important that you make sure the equipment you use (pots including lids, spoons, etc.) are super clean.
2. Pour the milk into a pan, and bring it to a near boil. Don’t let it actually boil because it could scald and ruin the taste - just get it to look like it’s threatening to boil. Leave it at this temperature for about 5 minutes. At the same time, it is important to really monitor the milk so it does not spill over the edge. Periodically stirring it helps.
3. Heat oven to 150°C.
4. Pour the milk into a vessel that can be used in the oven. Best is a nice ceramic pot.
5. Place the pot with the milk in the oven and gently simmer for between 3 and 4 hours. Do not cover it with a lid.
6. At this point a coffee-colored foam will appear on the surface if it has caramelized properly - it is now baked milk! Take it out of the oven and wait until it cools down to around 40°C. Very important to wait until cool because otherwise the heat will kill the helpful little fermentation guys in the next steps.
7. You can remove the foam or leave it. [Ed. note: I leave it so I am not sure the difference exactly - if anyone knows, please tell us in the comments!]
8. Pour a small amount of milk into the Kefir (or your substitute) and stir until smooth. Then pour this small amount of mixture back into the larger pot of baked milk.
9. Cover the pot with a lid and then wrap it in a blanket, or towel, to retain heat. Leave in a warm place for at least 8 hours - it should become thick. You can keep it in this warm state for up to 24 hours, depending on the temperature of your warm place and desired thickness. I feel just a little bit dirty typing that.
10. You can drink it right away after it has reached its desired thickness, but in summertime I recommend chilling it first! It can be poured into jars, and keeps for about a week in the refrigerator.

Tips

• 1 liter of milk yields approximately 700 ml of Ryazhanka.
• There is an alternative mason jar version of the recipe where you pour it into the jars after Step 8. In this case, you must absolutely boil the jars to sterilize them. Then use a coffee filter and an elastic band to cover them while you wait for fermentation.
• You can use Ryazhanka for the same applications you would use yogurt for, but Ryazhanka is naturally much sweeter.
• Try adding Ryazhanka to smoothies to fortify them in a creamy way - or substitute for milk when making pancakes to lend a more velvety texture. Sometimes Ryazhanka is used when making fancy baked desserts!

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The 459th day of a nine year invasion that has been going on for centuries.
One day closer to victory.

🇺🇦 HEROYAM SLAVA! 🇺🇦

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Verified Charities

• u/Jesterboyd is a mod for ukraine and local to Kyiv. He is currently selling t-shirts raising money to buy some very interesting drones. Link to donation
• United24: This site was launched by President Zelenskyy as the main venue for collecting charitable donations in support of Ukraine. Funds will be allocated to cover the most pressing needs facing Ukraine.
• Come Back Alive: This NGO crowdfunds non-lethal military equipment, such as thermal vision scopes & supplies it to the front lines. It also provides training for Ukrainian soldiers, as well as researching troops’ needs and social reintegration of veterans.
• Trident Defense Initiative: This initiative run by former NATO and UA servicemen has trained and equipped thousands of Ukrainian soldiers.
• Ukraine Front Line US-based and registered 501(c)(3), this NGO fulfills front line soldiers' direct defense and humanitarian aid requests through their man on the ground, Ukraine's own u/jesterboyd.
• Ukraine Aid Ops: Volunteers around the world who are helping to find and deliver equipment directly to those who need it most in Ukraine.
• Hospitallers: This is a medical battalion that unites volunteer paramedics and doctors to save the lives of soldiers on the frontline. They crowdfund their vehicle repairs, fuel, and medical equipment.
• Humanity: Co-founded by u/kilderov, Humanity is a small team of volunteers securing and distributing humanitarian aid to the most vulnerable populations in temporarily occupied Kherson Oblast. Kilderov and his friends were under occupation in Nova Kakhovka in 2022.

You can find many more charities with diverse areas of focus in our vetted charities list HERE.

I bought this 1st Edition book at an estate yesterday for a dollar! I didn’t know it was at the time but I thought it looked really old.