Hedge Funds Cut Treasury Basis Exposure 20%

Hedge funds have scaled back the leveraged U.S. Treasury basis trade as shrinking price gaps between Treasury securities and futures, weaker demand and less attractive returns reduce opportunities to profit. Morgan Stanley estimates cited in the reports put positions at roughly $900 billion to $1.2 trillion, down from about $1.26 trillion earlier in the year; the retreat has been especially pronounced in shorter-dated contracts, while longer-term trades remain active. Strategists generally describe the decline as a response to fewer relative-value opportunities, not evidence of current market stress. Still, the trade’s reliance on short-term borrowing means a sudden funding or market shock could trigger margin calls and forced Treasury sales, and hedge funds remain an important source of market liquidity.