Key Takeaways
- • Hedge funds' cash-futures basis trade has plateaued after several years of rapid growth, with rising Treasury yields, higher financing costs and regulatory changes reducing its appeal, according to analysts cited by Reuters.
- • Capital is migrating into swap-spread arbitrage, which the Dallas Fed says carries substantially more dollar risk per unit of notional than basis trades, so even modest outflows could trigger outsized unwinds.
- • Hedge funds still held roughly $830 billion of cash-futures basis positions as of September 2025, about 35% of their long Treasury exposure, per Fed economist Phillip Monin.
- • Swap-spread positions reached $305 billion by September 2025, or 13% of hedge fund long Treasury exposure, making them the second-largest Treasury-related hedge fund position.
- • Monachil Capital's Ali Meli expects basis trade pressures to return, citing an estimated $3 trillion to $5 trillion of added bank balance-sheet capacity and continued government borrowing.
Summary
The slowdown in the US Treasury basis trade has pushed investors into other relative-value strategies, Reuters reported on October 28. The basis trade, in which hedge funds buy cash Treasuries funded through the repo market while selling futures against them, has plateaued after several years of rapid growth. Analysts attribute the slowdown to rising Treasury yields and financing costs, which have raised the risks of the leveraged trade, as well as regulatory changes that allow banks to hold more Treasuries and reduce price discrepancies between cash and futures.
Some capital previously deployed in basis trades has moved into swap-spread arbitrage, a wager on the gap between Treasury yields and SOFR-linked swap rates. Matthew Franklin-Lyons, global head of rates trading at JP Morgan, said speculative activity has extended into strategies exposed to liquidity, volatility and credit risk, particularly sovereign asset swaps, including outside the US. Amrut Nashikkar, head of derivatives strategy at Barclays, said swap spreads are the kind of trades levered funds would be attracted to. The Dallas Federal Reserve noted in a recent research note that swap-spread positions carry substantially more dollar risk per unit of notional value than basis trades, meaning modest capital outflows could trigger disproportionately large unwinds of Treasury futures and repo financing. Gennadiy Goldberg, head of US rates strategy at TD Securities, said levered investors may not be rolling cash-futures positions into swap spreads dollar for dollar.
The cash-futures basis trade nonetheless remains the dominant hedge fund Treasury strategy. According to Fed economist Phillip Monin, hedge funds held roughly $830 billion of such positions as of September 2025, about 35% of their total long Treasury exposure. Swap-spread positions had grown to $305 billion, or 13% of long Treasury exposure. Agha Mirza, global head of rates and OTC products at CME Group, said the reduction in basis trade size is not visible in Treasury futures volumes or open interest, which are at record levels. Other relative-value positions, including maturity-matched trades between on-the-run and off-the-run securities and TIPS-nominal arbitrage, may also have drawn capital from basis trades.
The retreat may not be lasting. Ali Meli, founder and CIO of Monachil Capital Partners, expects the same pressures to return, and estimated that regulatory changes have given banks $3 trillion to $5 trillion of additional balance sheet capacity. With government borrowing continuing to grow, Treasury buyers will remain in demand, he said. Padhraic Garvey, head of global rates and debt strategy at ING, observed that hedge funds play whichever game suits them best at any point in time.
Some capital previously deployed in basis trades has moved into swap-spread arbitrage, a wager on the gap between Treasury yields and SOFR-linked swap rates. Matthew Franklin-Lyons, global head of rates trading at JP Morgan, said speculative activity has extended into strategies exposed to liquidity, volatility and credit risk, particularly sovereign asset swaps, including outside the US. Amrut Nashikkar, head of derivatives strategy at Barclays, said swap spreads are the kind of trades levered funds would be attracted to. The Dallas Federal Reserve noted in a recent research note that swap-spread positions carry substantially more dollar risk per unit of notional value than basis trades, meaning modest capital outflows could trigger disproportionately large unwinds of Treasury futures and repo financing. Gennadiy Goldberg, head of US rates strategy at TD Securities, said levered investors may not be rolling cash-futures positions into swap spreads dollar for dollar.
The cash-futures basis trade nonetheless remains the dominant hedge fund Treasury strategy. According to Fed economist Phillip Monin, hedge funds held roughly $830 billion of such positions as of September 2025, about 35% of their total long Treasury exposure. Swap-spread positions had grown to $305 billion, or 13% of long Treasury exposure. Agha Mirza, global head of rates and OTC products at CME Group, said the reduction in basis trade size is not visible in Treasury futures volumes or open interest, which are at record levels. Other relative-value positions, including maturity-matched trades between on-the-run and off-the-run securities and TIPS-nominal arbitrage, may also have drawn capital from basis trades.
The retreat may not be lasting. Ali Meli, founder and CIO of Monachil Capital Partners, expects the same pressures to return, and estimated that regulatory changes have given banks $3 trillion to $5 trillion of additional balance sheet capacity. With government borrowing continuing to grow, Treasury buyers will remain in demand, he said. Padhraic Garvey, head of global rates and debt strategy at ING, observed that hedge funds play whichever game suits them best at any point in time.
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