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Hedge funds scale Treasury cash-futures basis trade to $1.2 trillion
Morgan Stanley estimated positions fell 20% this year to about $1.2 trillion, as the trade relies on borrowed purchase money versus a loan that can expire before it is fully paid off.
Hedge funds have built a large Treasury cash-futures basis trade, using borrowings to buy US government debt while selling Treasury futures to capture a pricing gap, according to CryptoSlate.
The key risk in the structure is timing, because the hedge fund's borrowing can expire before the trade’s payoff period ends, even though the US government’s ability to repay its debt does not directly address the fund’s obligation to its lender.
CryptoSlate notes Morgan Stanley estimated positions had fallen 20% this year to about $1.2 trillion, and said it had not found evidence of broad basis-related market stress at that point.
The outlet explains that futures contracts set terms for a later transaction, with allowable deliverable securities linking their prices without requiring them to move identically.