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Hedge funds cut Treasury basis trade exposure amid weaker returns
Morgan Stanley estimates capital in leveraged basis positions dropped about 20% this year to roughly $1.2tn.
Hedge funds are scaling back their involvement in the US Treasury basis trade as weaker returns and shifting demand for government bonds and futures make the strategy less attractive, according to a Reuters report.
Morgan Stanley estimates capital deployed in leveraged basis positions has fallen by around 20% this year to about $1.2tn, citing a rise in expectations for US interest rates and trading conditions that are less supportive for capturing the spreads the trade depends on.
The Treasury basis trade typically involves buying Treasury securities while shorting related futures, with hedge funds financing the cash positions through short-term borrowing to amplify returns from small price discrepancies.
The strategy has faced heightened scrutiny during periods of market stress because the leverage and borrowing can leave positions vulnerable to margin calls, with forced selling of Treasuries potentially amplifying declines when liquidity deteriorates.