$1 Trillion Basis Trade Remains Tame Despite Market Jitters, Says McGeever

Against the backdrop of international economic instability and recent tariff-driven volatility, the massive $1 trillion "basis trade" in Treasuries has remained surprisingly resilient, with little sign of anticipated market dislocation. The basis trade-in which hedge funds use massive leverage to exploit tiny price differentials between cash bonds and futures-has exploded to record levels, but the U.S. bond market remains tranquil. Treasury volatility has dropped back below multi-year highs, repo market liquidity is strong, and regulators' threat of a sudden unwind have yet to materialize. Asset managers and hedge funds alike continue to add positions, speculating that the market is stable enough. Despite risks if borrowing costs spike, analysts say the system is coping better than skeptics had hoped, with the Federal Reserve poised to step in if needed.

 

Source: Reuters