Collateral, Haircuts, and Repo Funding Risk
Credit creation depends on collateral supply, quality, and carry costs, so shocks that shrink the collateral base or raise haircuts immediately reduce lending and economic activity.
Every credit system runs on three elements: collateral supply, collateral quality, and cost of carry. When supply falls, quality deteriorates, or storage/energy costs rise, lenders raise haircuts and lend less against the same asset. Less collateralized lending means less money put to work and weaker economic activity, even when no formal default has occurred.
| Instrument | Side | Target | Reason |
|---|---|---|---|
| BIL | Long | We believe that when collateral bases shrink and haircuts widen, credit creation slows and funding conditions tighten before equity stress fully appears. Short-duration Treasury exposure preserves dry powder while the system reprices leverage and collateral quality. |
Daily repo rollovers turn modest haircut increases into forced sales, so even holders of the most liquid assets face rapid funding and refinancing risk.
Roughly half of global repo loans must roll every day. If collateral quality slips or risk appetite fades, the same asset may suddenly support less cash. Borrowers then must post more collateral, find a new lender, or sell. That is how a funding problem becomes a forced sale, and why leveraged positions can unwind violently even against U.S. Treasuries.
| Instrument | Side | Target | Reason |
|---|---|---|---|
| SPY | Short | We believe rising refinancing and haircut risk in overnight funding markets raises the odds of forced de-leveraging across risk assets. When leverage must be reduced quickly, broad equity beta is typically the first and most liquid place that selling lands. |
Themes
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