Key facts
- The US Treasury basis trade has plateaued due to rising yields, financing costs, and regulatory changes.
- Investors are shifting capital to swap-spread arbitrage and other relative-value strategies.
- Swap-spread positions carry substantially more dollar risk per unit of notional value than basis trades.
- Hedge funds held an estimated $830 billion in cash-futures basis positions as of September 2025.
- Swap spread positions reached $305 billion by September 2025, making them the second-largest Treasury-related position for hedge funds.
The slowdown in the US Treasury basis trade, a strategy favored by hedge funds, is prompting a shift in capital to other areas of the rates market. This retreat is attributed to increased Treasury yields, higher financing costs, and regulatory changes that have reduced profit opportunities. Investors are increasingly drawn to swap-spread arbitrage and other relative-value strategies that offer leverage and capital efficiency, despite carrying greater risk.
Swap-spread wideners, particularly those sensitive to front-end yield curve movements, have become more appealing. These trades benefit when swap rates rise relative to Treasury yields, often linked to easing banking regulations. While the basis trade remains dominant, its size has been impacted, with swap spread positions expanding significantly.
Analysts suggest that while pressures on the basis trade may return, the current shift reflects hedge funds adapting to market conditions. Other relative-value trades, such as maturity-matched trades and arbitrage between Treasury Inflation Protected Securities (TIPS) and nominal Treasuries, are also absorbing capital.