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Treasury Basis Trade Volume Hits Over Two-Year Low as Arbitrage Shrinks, Signaling Strong Demand
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The scale of the popular 'basis trade' in the US Treasury market has fallen to its lowest level in over two years, according to a report from financial news outlet 财联社. Wall Street strategists attribute this decline to reduced price dislocations in the bond market, which have narrowed the arbitrage opportunities available to hedge funds. The basis trade involves exploiting small price differences between Treasury futures and the underlying cash bonds, often using significant leverage. The shrinking spreads are making the strategy less attractive, potentially removing a key source of liquidity from the approximately $32 trillion market. While a sudden contraction in liquidity has historically caused market turmoil, strategists from Morgan Stanley and Citigroup note that the trade is far from disappearing. They view the current cooling as a reflection of fewer relative-value opportunities rather than a systemic risk, and it may also indicate robust underlying demand for US Treasuries.
Source report
September 22 — The size of a popular trading strategy in the U.S. Treasury market has fallen to its lowest level in more than two years, according to Wall Street strategists, who suggest this reflects a reduction in price dislocations and a narrowing of arbitrage opportunities available to hedge funds.
The strategy, known as the basis trade, helps boost demand for U.S. Treasuries and provides liquidity to the roughly $32 trillion market. It typically involves exploiting small price differences between Treasury futures and the corresponding cash bonds, with traders using significant leverage to amplify returns.
As these price spreads continue to narrow, the appeal of the basis trade is diminishing, potentially removing a key source of funding from the market. While sudden liquidity contractions have triggered financial market turmoil in the past, strategists at banks including Morgan Stanley and Citigroup note that the trade is far from disappearing. Instead, the current cooling largely reflects a decline in relative value opportunities.
Source
财联社Eastern
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Hedge Funds Reduce US Treasury Basis Trade as Bond Spreads Vanish