| >It seems there's a liquidity problem in the markets, which is also weird because stocks are being sold, so there should be liquidity. This is a normal relationship. The financial system has leverage. When liquidity dries up and sellers dominate, volatility rises which feeds back into valuable risk metrics and realize portfolio volatility. That causes participants to downsize their exposure to keep the same risk. In these cases the participants don't necessarily have extra liquidity to deploy until after volatility and uncertainty settles. >For a while, even gold went down, which is also highly unusual during a market crisis. During a true crisis this is actually not that uncommon. In the trading space, you saw what you can during these events. In extreme circumstances where correlations all go to one even the safe havens get sold off to raise cash. The gold liquidation was a sign of pressured margin metrics and very high stress. You can see how quickly gold recovered after the peak stress, confirming that situation. >One reason that is frequently cited now and also in this article is because some hedge funds have specialized on the so called "basis trade", which I never heard of before. It basically means buying large amount of treasuries and speculating on their futures. The basis trade is more of an arbitrage than a speculation. The global eurodollar system (not currency, global offshore dollars) is about 20 trillion dollars in size. The basis trade is essentially a method in which regulated US financial markets are exported to The world at large to be used in the global, emergent financial system. Instead of buying a treasury directly, one can use the futures/eurodollar market, and the basis traders will arbitrage the difference and keep everything in line. >At some point, the FED would normally intervene and buy treasuries. The issue that the FED is facing isn't so much their balance sheet capacity but the tariff-driven inflation outlook and how it interacts with their mandate. That said, they did clearly communicate today that they would be willing to step in if there were severe signs of systemic instability. The reality is... if tariffs really do cause an inflation wave, yields at 5% may be relatively low... |