The International Monetary Fund published an IMF Notes article by Anil K. Kashyap and Jeremy C. Stein summarising research on the sources of US Treasury market fragility and arguing that the Federal Reserve should prepare more targeted, duration-neutral tools for future episodes of market dysfunction, rather than relying on large-scale, unhedged Treasury purchases. The article links recent stress episodes, including March 2020 and April 2025, to market structure and intermediation constraints: a larger Treasury supply, publicly held federal debt around 100 percent of GDP, dealer balance sheets that have not expanded in line with issuance, and increased use of Treasury futures and swaps by asset managers to obtain duration exposure while conserving balance sheet for higher-yielding assets. In this structure, hedge funds and dealers connect cash and derivative markets through leveraged arbitrage such as the cash-futures “basis trade”, often financed in the repo market with borrowing of up to 99 percent of the position, creating vulnerability to margin and funding shocks and forced unwinds that overwhelm dealer capacity. Against this backdrop, the authors point to the Federal Reserve’s roughly USD 1.6 trillion Treasury purchases in a few weeks in March 2020 as restoring functioning but blurring the line between market-function support and monetary policy, and they propose that any future emergency buying be hedged by simultaneously selling Treasury futures or taking equivalent derivative positions to remain duration-neutral. They also discuss moral hazard and suggest limiting intervention to clearly dysfunctional thresholds, allowing spreads to widen beyond normal levels and capping only extreme dislocations. (The IMF notes the views expressed are those of the authors and do not necessarily reflect IMF policy.)

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