Siu declined to comment, as did representatives for Citic Capital and ICBC.
Liquidity Worries
The 59-year-old trader and Citic are joining forces at a time when the market for Treasuries, long considered the deepest and most-liquid in the world, has become increasingly hard to navigate. As the Dodd-Frank Act leads the big U.S. banks to retreat from the business of lending and trading Treasuries, more investors have voiced concern that liquidity has become less predictable.
That’s spurred a move into futures, which don’t require the large sums of money upfront and also trade electronically.
“As balance sheet becomes more of a problem, people are buying futures instead,” said Howard Finkel, who has spent 25 years working as relative-value trader for Treasuries, including stints at Millennium Partners and BTIG.
Trading in the contracts, which give the buyer the right to purchase Treasuries at a set price on a future date, has ballooned to equal 77 percent of cash volumes, from 59 percent in 2012, according to CME Group Inc.
That demand has caused the contracts to trade at a premium relative to the underlying bonds. It’s exactly those “different supply and demand dynamics” that CCSZF seeks to profit from, according to a July regulatory filing. Typically, funds can do so by buying the bond and shorting the futures to lock in gains when the contract expires and prices converge.
Price Discrepancies
But because the price discrepancies traders seek to arbitrage are so small, perhaps only 1/10th of a percentage point, firms like CCSZF typically try to juice returns by borrowing money through repurchase agreements -- with sums reaching $60 for each dollar of invested capital in some cases. For CCSZF, that type of leverage would boost its assets under management to $3 billion.
If you can get financing, it’s easier to “step in and pick up some of these coins you find on the sidewalk,” said Stuart Sparks, an interest-rate strategist at Deutsche Bank AG.