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      Hedge Funds Withdraw from Treasury Basis Trade as Profitability Declines

      Hedge funds are significantly reducing their involvement in the Treasury basis trade, with over $200 billion in leveraged positions unwound in recent months. This strategy, which had grown to approximately $1 trillion, has become less attractive as the spreads that once made it profitable have narrowed, diminishing potential returns even with high leverage.

      As of early 2026, hedge funds held around $2 trillion in U.S. Treasuries, accounting for a record 7% of the entire Treasury market. This is more than double the share from five years ago. The basis trade, which involves buying cash Treasuries and shorting corresponding futures contracts to capture small price differences, had previously been a lucrative strategy for major hedge funds like Millennium Management and Citadel.

      The decline in profitability is attributed to amplified market volatility driven by geopolitical tensions and increased government debt issuance. While the strategy's reliance on high leverage in the repo market poses systemic risks, the current withdrawal is occurring in a more orderly manner, with funds voluntarily reducing positions rather than being forced out by liquidity crises.

      © 2026 KLEA News. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

      Source: KLEA News

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