A Vanishing Treasuries Trade Poses Threat to Largest Debt Market
- Cash-futures basis, formerly around $1 trillion, has dwindled
- A permanent shift would risk sapping liquidity in U.S. bonds
A statue of Albert Gallatin, former U.S. Treasury secretary, stands outside the Treasury building in Washington, D.C.
Photographer: Al Drago/BloombergThis article is for subscribers only.
A Treasuries arbitrage strategy favored by hedge funds has fallen into near-hibernation, threatening liquidity in the world’s largest debt market.
Bets that use borrowed money to profit from tiny price discrepancies between futures and the underlying cash Treasuries unraveled in a matter of weeks amid the global rush to safety in March. Known as the cash-futures basis trade and commanding almost $1 trillion at its peak, the strategy is now about half that size, and many analysts doubt it will revive: The profit potential has shrunk, and traders are still smarting from their first-quarter pain.