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22min chapter
Martin Pelletier & Joseph Wang on Stock Market Concentration, Cash-Futures Treasury Basis Trade, Structured Products, and New York Community Bank
Forward Guidance
Levering up the Basis Trade in Fixed Income and Treasuries
This chapter explores the levering up of the basis trade in fixed income and treasuries, where hedge funds buy cash treasuries and sell futures to profit from price differences. It discusses the expensive nature of treasury futures relative to cash and how asset managers leverage up to beat their benchmark by investing in higher yielding credit instruments. The chapter concludes with a focus on the potential risks of the trade and its vulnerability to a shock in asset managers' credit investments.
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