Is basis trading "dead"? Treasury bet strategies favored by hedge funds show signs of fatigue

Glonghui, July 24 | Hedge funds’ most popular trading strategy in the US bond market is showing signs of approaching its capacity limit. This strategy, known as basis trading, mainly bets on tiny price differences between US Treasury futures and corresponding cash bonds, amplifying returns by borrowing large amounts of capital. Now, however, these price spreads are narrowing, and trading momentum is weakening. Activity in the repo financing market, which some hedge funds commonly use to gain leverage, has declined, and short positions in Treasury futures are decreasing, partly indicating a retreat from basis trades. JPMorgan estimates that, over recent months, leveraged investors have reduced the capital allocated to basis trading by more than $200 billion, down to $1 trillion.