Now the insurance company can go ahead and pledge the borrowed Treasury securities as collateral for its derivatives trade. Of course, the dealer may not have the spare Treasury securities on hand, and so, to obtain them, it may have to engage in the mirror-image transaction with a third party that does – say, a pension fund.
Thus, the dealer would, in a second leg, use the junk bonds as collateral to borrow Treasury securities from the pension fund. And why would the pension fund see this transaction as beneficial?