Tier 2 Treasury Market

Key Variables To Watch

• [UNVERIFIED] The OFR report’s concluding statement acknowledged uncertainty about the legality of the proposed Fed liquidity facility to purchase Treasuries from hedge funds.

  when they wrote this paper, they literally said, last line is we don’t know if this is even legal

The Thesis

• [UNVERIFIED] The OFR March 2025 report explicitly warned that if these hedge funds begin selling Treasuries during a market stress event, the result would be catastrophic, and recommended the Fed create a pre-emptive liquidity facility to purchase Treasuries from hedge funds.

  this March of 25 report that was put out on OM FIF is basically saying look if something happens and these guys start selling we’re done. Okay it is a disaster. So they want the Fed to create a liquidity facility in advance

• [UNVERIFIED] The Office of Financial Research (OFR) identified 10 to 11 hedge funds domiciled in the Cayman Islands holding approximately $450 billion in U.S. Treasury securities, with an average leverage ratio of 56 times.

  the hedge funds, 10 or 11 of them in the Cayman Islands, had about $450 billion worth of uh treasuries that they had leveraged up on average 56 times according to OM FIF whose job is to know this

• [UNVERIFIED] The Fed and Treasury investigation discovered that these hedge funds actually control $1.85 trillion in treasuries, after initially understating the exposure by missing an additional $1.4 trillion.

  they actually control 1.85 billion. and the Fed and Treasuries had said very clearly, this is an ongoing investigation

• [MISLEADING] These 10-11 Cayman Islands hedge funds have become the largest single holder of U.S. Treasuries worldwide, surpassing Japan and other sovereign holders.

  they’re now the largest holder of treasuries in the world superseding Japan and so forth and so on

  • Correction: A more accurate statement would be: ‘These hedge funds hold more U.S. Treasuries than Japan and other sovereign central banks hold in official reserves.’ This distinguishes between official (central bank) holdings and private sector holdings, which are typically much larger in aggregate.
• [UNVERIFIED] The average leverage ratio of 56 times implies that some individual hedge funds may be operating at leverage levels of 100 times or higher, representing extreme risk concentration.

  if the average is 56, that means we can be assured that there are hedge funds out there that are 100 times leverage