Lates News

Wall Street strategists say the size of a popular U.S. Treasury trade has fallen to its lowest level in more than two years, reflecting a decline in mispricing opportunities in the bond market for hedge funds to exploit. The strategy, known as the "basis trade," helps provide demand and liquidity to the U.S. Treasury market. The trade exploits small price differences between Treasury futures and cash bonds, using large amounts of borrowed money to amplify its scale. As these spreads continue to narrow, the trade is cooling, and the market may lose an important source of funding as a result. However, strategists at banks including Morgan Stanley and Citigroup say the trade is far from gone, and the weakening momentum merely reflects fewer relative-value opportunities. "Basis trade positions are shrinking as market dislocations and volatility have fallen sharply over the past few years," said Jason Williams, head of U.S. rates strategy at Citigroup. "Rather than signaling risk, the narrowing opportunity set suggests that underlying Treasury demand may be stronger than we thought." According to Morgan Stanley, the notional size of Treasury basis trades involving leveraged investors has fallen from $1.26 trillion at the start of the year to about $900 billion.