WASHINGTON: Hedge funds’ growing exposure to Treasuries is primarily due to the revival of the cash-futures basis trade, according to a Federal Reserve economist.
The highly leveraged trade now accounts for US$830bil of hedge funds’ Treasury long positioning as of September, about double its previous peak in early 2020, according to a report authored by principal economist Phillip Monin.
That represents 35% of their total long Treasury exposure, which is dominated by arbitrage strategies including swap spreads and maturity-matched trades.
The basis trade involves going short a Treasury futures contract and long a repo-financed Treasury security that is deliverable into the futures, the report said.
Between September 2023 and September 2025, hedge funds’ gross US Treasury exposure had doubled to US$4 trillion, made up of US$2.4 trillion long positioning and US$1.6 trillion short.
Basis trade and swap spread arbitrage account for nearly half of the long positions, while the remaining exposure is distributed across yield curve trades, unencumbered cash holdings, and long-only investment uses, according to Monin.
Hedge funds’ expansion in the market is striking. Since the beginning of 2023, hedge funds have more than doubled their gross Treasury exposures, repo borrowing, and monthly turnover in the market. — Bloomberg