Making Sense Back to basis: Why the Treasury basis trade is in focus
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May 30, 2025 In this discussion, Brian Fitzsimmons, Head of North America Rates Securities Trading at J.P. Morgan, shares his expertise on the U.S. Treasury cash-futures basis trade. He explains the intricacies of this arbitrage strategy and its relevance amid market volatility. The conversation dives into the dynamics of leverage, regulatory impacts on treasury demand, and the implications for financial stability. They also explore the challenges posed by increased Treasury issuance and the importance of managing liquidity and counterparty credit risk.
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Basis Trade Explained
- The Treasury cash futures basis trade profits from price differences between Treasury securities and futures contracts through a convergence arbitrage.
- Asset managers often pay a premium for futures due to simplified execution, liquidity, and flexible treasury risk management.
April Volatility Impact
- Basis trade drew scrutiny during April's market volatility but showed little stress or liquidation.
- Swap spreads, not basis trades, were the focal point of market stress during that period.
Hidden Leverage Risks
- Hidden leverage in the Treasury market is a key concern, especially in the basis trade leveraged by hedge funds.
- Regulators focus on the financial stability risks stemming from massive, rapid unwinds of these leveraged portfolios.