Hedge Fund Basis Trade ‘Probably’ Back and Posing Risk, Fed Says
- Fed research examined growth in hedge fund repo borrowing
- Short positioning in Treasury futures continues to increase
The US Treasury building in Washington, DC.
Photographer: Joshua Roberts/BloombergHedge funds have “probably” increased their positions in highly leveraged Treasury basis trades, posing a risk to financial stability, according to a research paper published by the Federal Reserve.
Even the US central bank can only guess at the magnitude of basis trades — which exploit price differences between Treasury futures contracts and the notes and bonds eligible for delivery. However data on futures positioning and repo borrowing of deliverable securities “are consistent with hedge funds increasing their positions in the Treasury cash-futures basis trade,” researchers Daniel Barth, R. Jay Kahn and Robert Mann wrote in the paper published Wednesday.
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Hedge Fund Basis Trade ‘Probably’ Back and Posing Risk, Fed Says