No Fed? No Problem

Older Treasuries have less liquidity and are less desirable than newly issued Treasuries. RV hedge funds already have these on their books as part of ongoing trades. One of their trades is to buy a Treasury bill and short an equivalent Treasury future.

These funds use leverage to enhance returns.

Banks are generally more willing to extend leverage when the collateral is newer Treasuries, which are more liquid.

The problem? RV funds are capital-constrained — much of their cash is tied up in older Treasuries.

This is where the U.S. Treasury steps in.

As noted by Scott Bessent, there’s now a mechanism where the Treasury repurchases older Treasuries from hedge funds.

This frees up cash, enabling funds to lever up further and participate more aggressively in upcoming Treasury auctions.

Here’s a simplified example with illustrative numbers:

• The Treasury buys $100 of older bonds from a hedge fund.

• The fund now uses that cash as margin to borrow more, buying $500 of new Treasuries at auction.

• Result: the fund profits, and the Treasury raises capital. The economy sees a net injection of $400.

While this example is simplified and the figures are illustrative, it captures the dynamic:

RV hedge funds, with the help of Treasury buybacks and bank leverage, are acting as indirect conduits of liquidity.

This functions similarly to quantitative easing (QE) — except the risk doesn’t sit on the Fed’s balance sheet, but on the hedge funds’.

Where can this unravel?

If RV hedge funds experience significant losses or blow up their trades, banks holding that exposure could face major losses.

This could trigger a market dislocation or worse — a systemic liquidity event.

But history suggests: if that happens, the Fed steps in, restarts QE… and assets like Bitcoin surge in response.