Part and parcel of the massive rise in financial assets has been the basis and carry trade. A question being asked is if the Fed can ensure a liquid and stable Treasury market for the huge “basis trades” and “carry trades” in 2025. The recent surprising yield spike unnerving in that context. An overheated economy with resurgent inflation is not what the Fed had in their forecasts. Trump 2.0 is about to enter the picture entering among marketplace instability and liquidity issues increasing concern for egregiously speculative leverage with its eternally levered “basis trade”.
The unrelenting expansion of non-productive debt (non-productive a theme in the U.S. and Canada also, how many trillions of this has the Biden admin created in its four years?) Markets in 2024 were spectacular and caught many unawares, with all the stories of gloom for much of the year until shorts & humbugs were forced to throw in the towel. The power of loose money from the basis and carry trades fueled by the Fed & ramped Biden spending forced markets higher.
The highly levered Treasury “basis trade” had reportedly surged to a record $1.15 TN (from Bloomberg) by early November last year. This expansion of “repo” leverage generates new market liquidity intermediated through the money market fund complex, resulting in an expansion of MMFA. It transforms riskier long-duration Treasuries into perceived safe money fund deposits.
Total system “Repo” Assets inflated $678 billion, or 30% annualized, during the six months ended September 30th – to $7.395 TN. Broker/Dealer Assets surged $341 billion, or 26.3% annualized, during Q3 to a record $5.526 TN (one-year growth of $769 billion, or 16.2%).
The leveraged speculating community all played aggressively after the Federal Reserve concluded its short “tightening” cycle in July 2023.
Portable Alpha
Inherent to long dates speculative bubbles were reckless risk in ignored or in the case of the basis trade rewarded is the search for more. These patterns increase through each bubble cycle. Many of these strategies that blew up during the 2008 financial crisis are being repeated. Leverage, greed and the belief one is smarter than the next man are the hallmarks of these strategies.
We have seen the rebirth in 2024 and 2025 of ‘portable alpha.’ This is strategy uses derivatives to track returns of long-only indexes and then invests the excess cash in trades trumpeted by hedge funds. These include trend following or market-neutral equity strategies. Barclays in a note said around 22% of institutional investors, private banks and family offices adopted the investing style as a form of asset allocation in 2024 in their annual survey tracking 325 investors with $8.6 trillion in total assets. This was up from 10% the previous year.”
The result of this tells us rather than pulling back on levered risk many big money managers are leveraging up even more.
2024 Punter Facts to Be Aware of:
At this point logic tells us the bubbles burst, or inflation accelerates late in the cycle. Logic doesn’t apply in manias, however.
- “Investors plowed more than $1 trillion into U.S.-based exchange-traded funds in 2024, shattering the previous record set three years ago
- The rebound from last year’s lackluster flows marked a broad embrace of U.S. assets in a year in which the S&P 500 gained around 25%
- Total assets in U.S.-based ETFs reached a record $10.6 trillion at the end of November, according to… ETFGI data, an increase of more than 30% from the start of 2024.
- Invesco’s QQQ, which tracks the tech-heavy Nasdaq-100 Index attracting more than $27 billions of fresh cash through mid-December. It was an eye-popping figure after QQQ brought in $7.3 billion in 2023” – Wall Street Journal (Jack Pitcher)
- SIFMA data showed total 2024 U.S. corporate (“investment grade/high yield, nonconvertible/convertible, callable/noncallable and fixed rate/floating rate”) issuance surged 30.2% to $1.957 TN.
- “BofA Securities was the top arranger of US leveraged loans in 2024 as the value of deals rose 122%. Companies borrowed $2.22 trillion of loans vs. $1 trillion in 2023.” – Bloomberg
- “The muni market saw $507.585 billion of debt issued in 2024, up 31.8% from $385.061 in 2023. This surpasses the previous record of $484.601 billion in 2020…” – Bond Buyer
- MMFA expanded $873 billion, or 14.6%, in 2024. MMFA ballooned at a blistering 27% pace during the final 22 weeks of the year, a period when the Fed aggressively loosened policy. MMFA expanded an incredible $2.289 TN, or 50%, since the Fed began “tightening” in March 2022 – and $3.214 TN, or 88%, since the start of the pandemic (February 2020).
- Non-Financial Debt (NFD – from the Fed’s Z.1) expanded at a seasonally adjusted and annualized (SAAR) $3.342 TN in Q1, $3.471 TN in Q2, and $3.642 TN during Q3. For perspective, NFD expanded $2.534 TN in 2007 – an annual record that held all the way to pandemic 2020’s historic $6.797 TN.
- As of September 30th, Treasuries had inflated $1.965 TN, or 7.6%, over the previous year; $3.970 TN, or 16.8%, over two years; and $10.957 TN, or 66%, over 19 quarters.
- Total (Debt and Equities) Securities inflated $24.447 TN, or 19.0%, over the previous year, and $58.714 TN, or 62%, over 20 quarters – to a record $153.181 TN.
- Total Securities ended Q3 at 522% of GDP, dwarfing cycle peaks 375% (Q3 2007) and 357% (Q1 2000).
- Household Net Worth (Assets less Liabilities) inflated $17.277 TN, or 11.4%, in the 12 months ended September 30th – to a record $168.8 TN.
- Net Worth inflated $49,873 TN over 17 quarters, or 42%. Household Net Worth ended September at 575% of GDP, above previous cycle peaks 488% (Q1 2007) and 444% (Q1 2000).
Focus on yourself and what YOU CAN INFLUENCE, set your trading plan and goals in be set for 2022.
-comment section below data-
Subscribe and Follow
Find us at www.traderscommunity.com
Follow our contributors on Twitter @traderscom @thepitboss16 @knovawave @ClemsnideClem
Note these charts, opinions news and estimates and times are subject to change and for indication only. Trade and invest at your own risk.
Trade Smart!