Wall Street strategists say a popular US Treasury basis trade has dropped to its
smallest scale in more than two years, fewer reflecting exploitable mispricings
and reduced liquidity provision from hedge funds. The levered strategy, which
arbitrages small futures–cash price gaps, has cooled as those spreads
compressed, weakening an important source of Treasury demand. Morgan Stanley and
Citigroup strategists say the trade is not disappearing but that momentum has
waned as relative-value opportunities narrow; Citigroup’s head of US rates
strategy Jason Williams said lower market dislocations and have volatility
trimmed basis positions and could imply stronger-than-expected Treasury demand.
Morgan Stanley estimates nominal notional of leveraged participation in Treasury
basis trades fell from $1.26 trillion at the start of the year to about $900
billion.
