Hedge Funds Could Shrink Treasury Positions With Swap-Spread Trades

Hedge funds could shrink Treasury positions tied to basis trades while keeping leveraged rate exposure if they shift risk capital to swap spreads, potentially changing their footprint in the $28.9 trillion market. The analysis's authors, Matthew McCormick, Srini Ramaswamy and Hugo De Vere, describe a shift in risk budgets from basis trades to swap-spread wideners. They say the change could lower aggregate Treasury futures notional and the cash Treasury and repo positions that accompany the basis trades being replaced. “Even modest reallocation of risk capital from basis trades to swap spreads can produce an outsized decline in aggregate Treasury futures notional,” they wrote. A basis trade pairs a long Treasury position with a short position in related Treasury futures, seeking to capture a price gap between them.

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