Thread by @pauleluard

So I've been a bit silent lately but Covid has hit me a bit both physically and mentally. Anyway let's be honest that Archegos story is quite interesting and though I think it's just a case of "mate it's never going to fall 25%" it begs some interest thoughts for after.
1/10

Prime brokers are likely to have to reduce the leverage they provide, or equivalently increase the margins they need.
Looking at a portfolio of 60/40 US Bonds and stocks, a move from weekly VaR (value at risk) from 95% to 97% is a 40bp increase in the risk of the portfolio.
2/10

Now you might think that's small, but when you're 10x levered (and some funds are especially in Fixed Income RV space), a 40bp increase over 10bn assets means 400m extra margin, and that's a couple desks which have to cut their positions.
3/10

Now looking at equities some of the exposure has been clipped. The retail yolo calls have reduced as people prepare to spend for the summer season out. But FI is actually much more at risk because we all know @MagnusMacro is pushing repo fintwit.
4/10

But repo fintwit should have started last year. We had witnessed in March 20 a strong displacement in swap spreads before the Fed provided liquidity and cut rates.
Looking at the WN futures invoice spread you can see the extent of the moves. And it moved again in Feb21.
5/10

We have witnessed in the last few years a very large increase in futures positions lead by the back end.
Looking at the CFTC disagg data it shows leveraged accounts increased their WN short from circa $25mm of Dv01 in early 2014 to almost $200m Dv01 in early 2020.
6/10

And the March tantrum got Leveraged accounts to start downsizing, while Asset Managers still have large positions. Though for the latter it can be explained by the amount of issuance in the US market having sky rocketed and the size of hedges becoming larger as a result.
7/10

But this should not reduce the problem of leverage. Rates accounts are very sensitive to an increase in rates volatility as it brings risks of larger drawdowns and as such reduces the amount of leverage they can handle.
8/10

And trades such as basis trades (buy a bond and sell a future for ex) are inherently trading short gamma as they force the spread back towards the “mean” but a large deviation away forces them to cut.
So that’s why I believe we could see rates vol increase as PBs delever.
9/10

There is obviously a link between rates and FX volatility. Yet the recent pick up in 1Y>30Y hasn’t fed to FX vols yet. This can be explained by the lack of CBs movements lately and by the reflation trade pushing 30Y rates higher.
But we can expect some normalisation.
10/10