Today we continue along the lines introduced yesterday. In that post, I argued that the growing role of hedge funds in the US Treasury market reflects a deep structural shift in financial intermediation. As traditional bank-affiliated primary dealers become increasingly constrained by post-crisis regulations and balance sheet limitations, hedge funds have emerged as key actors in absorbing the growing supply of government debt and facilitating liquidity through arbitrage trades - most notably, the Treasury cash-futures basis trade and the swap spread trade. However, this market-based substitution introduces a set of fragilities that policymakers are only beginning to fully grasp.