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US Treasury bond spree could jolt markets if leveraged bets unravel

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An expected surge in Treasury bill issuance could throw a wrench into the gears of hedge fund trades that have resulted in record short positions, potentially disrupting bond markets if speculators quickly unwind their holdings.

In recent weeks, hedge funds have taken significant short leveraged positions in some Treasuries futures – contracts for the purchase and sale of bonds for future delivery – as part of a so-called basis trade which takes advantage of a difference between the price of cash bonds and futures, analysts say. The difference is partly resulting from asset managers’ demand for Treasuries futures, which could be due to economic concerns, analysts said.

However, new government bond issuance could push up rates in short-term funding markets where hedge funds leverage their holdings, possibly leading to an unwind of this positioning. This, in turn, could pressure bonds or even force the Federal Reserve to intervene, analysts have cautioned.

“This could be one risk to that kind of trade developing that forces a lot of these funds to close these basis trades and then create shock waves throughout the market,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities USA.

The recent resolution of the U.S. debate over extending the debt ceiling means Treasury bill sales are set to surge to about $1 trillion by year end as the Treasury General Account (TGA) is replenished. Generally, an increase in government borrowing drains reserves from the banking system, and because banks absorb the new issuance they have less money to lend.

That scenario could lead to a spike in rates in the repurchase agreements (repo) market, similar to what happened in September 2019. That was when falling reserves led to a surge in the cost that banks and other market players pay to raise overnight loans to fund their trades, forcing the Fed to intervene by injecting liquidity into repo markets.

“Less liquidity could mean a shift in the supply and demand of the repo market,” with hedge funds potentially facing higher rates just because there is less cash in the system to lend, said Steven Zeng, U.S. rates strategist at Deutsche Bank.

In that case, a large but orderly unwinding of hedge funds’ positions in Treasuries could push yields higher relative to other fixed-income instruments, he added. “A bad outcome … would be a disorderly unwind of these trades, which forces the Fed to step in.”

To be sure, the risk of liquidity drainage would diminish if money market funds absorbed the new Treasury bill issuance by reducing their investments in the Fed’s reverse repo facility (RRP), where they park their cash.

But some analysts fear bank reserves could decline if the Treasury bills do not offer higher returns than the RRP or if expectations of more interest rate hikes discourage money funds from extending the duration of their investments.

U.S. Treasury Secretary Janet Yellen last week said her department was monitoring for signs of market disruptions as the government rebuilds its cash balance through Treasury bills.

Fed Chair Jerome Powell also said in a press conference last week that the Fed would be “monitoring market conditions carefully” as the Treasury refills its balance.

BASIS TRADE

Relative value hedge funds and macro managers are typical hedge funds that enter basis trades, which work by selling a futures contract, buying Treasuries deliverable into that contract with repo funding, and delivering them at contract expiry. The unwinding of basis trade positions contributed to illiquidity in Treasuries in March 2020, when the market seized up amid rising pandemic fears, prompting the Fed to buy $1.6 trillion of government bonds.

Commodity Futures Trading Commission (CFTC) data at the end of May showed speculators’ bearish bets on U.S. Treasury two-year, five-year, and 10-year bonds had grown to their largest ever. Some of those shorts have been scaled back, but net shorts on two-year notes hit a new record in the week ending June 13.

Some hedge funds may short Treasuries because of macroeconomic assumptions.

“Quantitative hedge funds have been shorting Treasuries because trend models continue to indicate downtrend in prices and discretionary hedge funds see negatives, such as inflation, tight labor market and the hawkish Fed,” said Deepak Gurnani, founder and managing partner at hedge fund Versor Investments.

But according to several analysts, the recent buildup in shorts was more the result of the arbitrage opportunity than an indication of speculators’ bets on the direction of rates.

The buildup in shorts has coincided with an increased use of the repo market.

The volume of transactions underlying the Secured Overnight Financing Rate (SOFR), which is a measure of the cost of borrowing cash overnight collateralized by Treasuries, has risen rapidly this year, data from the New York Federal Reserve shows.

SOFR volume topped $1.6 trillion on June 1 – the highest since the New York Fed began publication of the rate in 2018.

“That data matches very well with the shorts by leveraged investors, so that’s suggesting that the leveraged funds are going long in cash Treasuries and being short in the futures,” said Deutsche Bank’s Zeng.

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Romanians vote in presidential election focused on high living costs, Ukraine war

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By Luiza Ilie

BUCHAREST (Reuters) -Romanians started voting on Sunday in the first round of a presidential election that may give hard-right politician George Simion a chance of winning, with voters focused on high living costs and the country’s support for Ukraine.

Opinion surveys show leftist Prime Minister Marcel Ciolacu, 56, leader of Romania’s largest party, the Social Democrats, will make it into the run-off vote on Dec. 8, with Simion, 38, of the Alliance for Uniting Romanians the likely runner-up.

About 3.7 million Romanians, or 20.7% of registered voters in the European Union and NATO state, had cast their ballots across the country by 1045 GMT, data showed. Voting ends at 1900 GMT with exit polls to follow immediately.

Voting by Romanians abroad, who can influence the result and where the hard right leader is popular, began on Friday.

Analysts expect Ciolacu to win the second round against Simion, appealing to moderates and touting his experience running Romania during a war next door.

But the prospect of a Ciolacu-Simion run-off vote could mobilise centre-right voters in favour of Elena Lasconi, leader of opposition Save Romania Union, ranked third in opinion surveys, analysts said.

Simion has cast the election as a choice between an entrenched political class beholden to foreign interests in Brussels and himself, an outsider who will defend Romania’s economy and sovereignty.

He opposes military aid to Ukraine and supports a peace plan as envisioned by U.S. President-elect Donald Trump, whom he admires, and would support a government that emulates that of Italy’s Giorgia Meloni.

“We want peace, the war must end so we stop being afraid,” 76-year-old Valentin Ion said after voting in Bucharest.

“Politicians must be more understanding and give money to the needy.”

Romania has the EU’s largest share of people at risk of poverty. Ciolacu’s coalition government of his Social Democrats (PSD) and centre-right Liberals has raised the minimum wage and increased pensions twice this year, but high budget spending has swollen deficits and kept inflation high.

“I am taking my parents and my children to go vote for PSD, it is the best party, Marcel Ciolacu gave us so much,” said Vasile Popa, 46.

Since Russia attacked Ukraine in 2022, Romania has enabled the export of millions of tons of grain through its Black Sea port of Constanta and provided military aid, including the donation of a Patriot air defence battery.

FAMILY VALUES

“The outcome is still very difficult to predict due to the high concentration of candidates and the splitting of the centre-right vote,” said Sergiu Miscoiu, a political science professor at Babes-Bolyai University.

Most candidates, he said, have campaigned on conservative messages such as protecting family values.

“Mainstream party candidates have a very catch-all message, on the one hand the nation, the army, religion and so on. On the other hand, we see a commitment to Europe, although it is seen more as a revenue source than an inspiration for values.”

© Reuters. A voter exits a voting booth, on the day of the first round of the presidential election in Bucharest, Romania, November 24, 2024. REUTERS/Andreea Campeanu

Outgoing two-term president Klaus Iohannis, 65, had cemented Romania’s strong pro-Western stance but was accused of not doing enough to fight corruption.

Romania’s president, limited to two five-year terms, has a semi-executive role which includes heading the armed forces.

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Israeli army orders Gaza City suburb evacuated, spurring new wave of displacement

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By Nidal al-Mughrabi

CAIRO (Reuters) -The Israeli military issued new evacuation orders to residents in areas of an eastern Gaza City suburb, setting off a new wave of displacement on Sunday, and a Gaza hospital director was injured in an Israeli drone attack, Palestinian medics said.

The new orders for the Shejaia suburb posted by the Israeli army spokesperson on X on Saturday night were blamed on Palestinian militants firing rockets from that heavily built-up district in the north of the Gaza Strip.

“For your safety, you must evacuate immediately to the south,” the military’s post said. The rocket volley on Saturday was claimed by Hamas’ armed wing, which said it had targeted an Israeli army base over the border.

Footage circulated on social and Palestinian media, which Reuters could not immediately verify, showed residents leaving Shejaia on donkey carts and rickshaws, with others, including children carrying backpacks, walking.

Families living in the targeted areas began fleeing their homes after nightfall on Saturday and into Sunday’s early hours, residents and Palestinian media said – the latest in multiple waves of displacement since the war began 13 months ago.

In central Gaza, health officials said at least 10 Palestinians were killed in Israeli airstrikes on the urban camps of Al-Maghazi and Al-Bureij since Saturday night.

Adding to the miseries of Gaza’s 2.3 million people, most of whom have been repeatedly displaced, heavy winter rain flooded hundreds of tents across the enclave, spoiling food and sweeping away plastic and cloth sheeting that had protected them against the elements.

“We ran in the middle of the night, the rainwater flooded the tent, the food is gone, the kids screamed and I am afraid they will get sick,” Rami, 37, a Gaza City man displaced at a former soccer stadium, told Reuters via a messaging app.

The Palestinian Civil Emergency Service said thousands of displaced people were impacted by the seasonal flooding and demanded new tents and caravans from aid donors to shield them.

HOSPITAL DIRECTOR WOUNDED BY GUNFIRE

In north Gaza, where Israeli forces have been operating against regrouping Hamas militants since early last month, health officials said an Israeli drone dropped bombs on Kamal Adwan Hospital, injuring its director Hussam Abu Safiya.

“This will not stop us from completing our humanitarian mission and we will continue to do this job at any cost,” Abu Safiya said in a video statement circulated by the health ministry on Sunday.

“We are being targeted daily. They targeted me a while ago but this will not deter us…,” he said from his hospital bed.

Israeli forces say armed militants use civilian buildings including housing blocks, hospitals and schools for operational cover. Hamas denies this, accusing Israeli forces of indiscriminately targeting populated areas.

Kamal Adwan is one of three hospitals in north Gaza that are barely operational as the health ministry said the Israeli forces have detained and expelled medical staff and prevented emergency medical, food and fuel supplies from reaching them.

In the past few weeks, Israel said it had facilitated the delivery of medical and fuel supplies and the transfer of patients from north Gaza hospitals in collaboration with international agencies such as the World Health Organization.

Residents in three embattled north Gaza towns – Jabalia, Beit Lahiya and Beit Hanoun – said Israeli forces had blown up hundreds of houses since renewing operations in an area that Israel said months ago had been cleared of militants.

Palestinians say Israel appears determined to depopulate the area permanently to create a buffer zone along the northern edge of Gaza, an accusation Israel denies.

© Reuters. Displaced Palestinian children stand near tents following rainfall, amid the Israel-Hamas conflict, in Gaza City November 24, 2024. REUTERS/Dawoud Abu Alkas

Israel’s campaign in Gaza has killed more than 44,000 people, uprooted nearly the entire population at least once, according to Gaza officials, while reducing wide swathes of the narrow coastal territory to rubble.

The war erupted in response to a cross-border attack by Hamas-led militants on Oct. 7, 2023 in which gunmen killed around 1,200 people and took more than 250 hostages back to Gaza, according to Israeli tallies.

(Reporting and writing by Nidal al-Mughrabi; editing by Mark Heinrich)

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Green activists in S. Korea demand tough action on plastic waste at UN talks

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By Minwoo Park and Daewoung Kim

BUSAN, South Korea (Reuters) – Hundreds of environmental campaigners marched on Saturday in the South Korean city of Busan to demand stronger global commitments to fight plastic waste at U.N. talks in the city next week.

About a thousand people, including members of indigenous groups, young people and informal waste collectors, took part in the rally, the organiser said, with some carrying banners saying “Cut plastic production” and “Drastic plastic reduction now!”.

The activists marched around the Busan Exhibition and Convention Centre, where the fifth session of the Intergovernmental Negotiating Committee (INC-5) will take place from Monday to discuss a legally binding global agreement on plastic pollution.

Debate is expected to focus on whether the deal should seek to slash production, while major producers such as Saudi Arabia and China have said in previous rounds that it should prioritise less contentious strategies, such as waste management.

“We are here with Greenpeace and our allies in the Break Free from Plastic movement to represent the millions of people around the world that are demanding that world leaders address plastic pollution by reducing the amount of plastic that we produce in the first place,” said Graham Forbes, global plastic campaign lead at Greenpeace.

People from different countries and of all ages took part in Saturday’s rally and some wore elaborate, decorated hats made from discarded plastic items.

“It looks like the Earth, and a living creature, because I wanted to say our living creatures are being affected by plastic pollution,” said Lee Kyoung-ah, 52, who was wearing a hat made of abandoned plastic buoy.

Lee Min-sung, 26, said he also hoped to see changes in everyday consumer habits.

© Reuters. Climate activists march on a street to demand stronger global commitments to fight plastic waste at the upcoming fifth session of the Intergovernmental Negotiating Committee (INC-5), in Busan, South Korea, November 23, 2024.   REUTERS/Minwoo Park

“I hope the culture of using ‘reusables’ becomes a cool, trendy movement, as that will reduce (waste) little by little,” said Lee, who brought his lunch from home in a glass container.

“I will pick up trash more often, whenever I have time, and throw away less to save the Earth,” said fourth-grader Kim Seo-yul, who flew from her home in Jeju Island to join the march.

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