Capital committed to leveraged Treasury basis trades fell 20% this year to $1.2 trillion, Morgan Stanley estimates, as the profit opportunity narrows. The pullback centers on two- and five-year futures; the bank says it sees no evidence of broad market stress.
Basis trading exploits a small price gap between cash Treasuries and futures: hedge funds borrow overnight to buy the bonds and sell matching futures to asset managers seeking greater interest-rate sensitivity. A Bank of America strategist cited moderating asset-manager demand for futures as a reason the trade’s opportunity set has shrunk. Dealer-bank inventories are higher after supplementary leverage ratio rules were loosened, while Treasury buybacks raised prices for older bonds; both reduce potential gains. Softer demand for Treasuries and futures also partly explains this year’s selloff.
CFTC data show hedge funds’ net short positions in two-year Treasury futures have fallen more than 40% from a 15-month high in March and by more than half from a record in December 2024. Asset managers’ net long positions are down more than 30% from their March peak. Separately, two people familiar with the matter said large hedge-fund Treasury holdings have prompted the New York Fed to raise questions about potential systemic risks.
