Basis trade retreat spurs shift into new rate bets
TLT•The slowdown in Treasury basis trades has pushed some hedge fund capital toward swap-spread arbitrage and other relative-value strategies. Swap-spread positions reached $305 billion by September 2025, while cash-futures basis positions stood at about $830 billion.
1. Capital shifts to other trades
The slowdown in the Treasury basis trade has driven investors toward other areas of the rates market, including swap-spread arbitrage. The basis trade pairs leveraged purchases of cash Treasuries with sales of Treasury futures; rising yields and financing costs have made it less attractive, while regulatory changes have reduced some opportunities.
2. Swap spreads carry risks
Swap-spread strategies can also use leverage but carry substantially more dollar risk per unit of notional value than basis trades, according to a Dallas Federal Reserve research note. Swap-spread wideners, particularly at the front end of the yield curve, have become more attractive, with expected returns relative to risk nearing levels seen in a traditional long basis trade.
3. Basis trade remains dominant
Phillip Monin of the Federal Reserve estimated hedge funds held about $830 billion in cash-futures basis positions as of September 2025, or roughly 35% of their long Treasury exposure. Swap-spread positions reached $305 billion, or 13%. Private credit manager Monachil Capital Partners founder Ali Meli expects the basis trade to regain momentum as government borrowing continues to grow.
