Hedge funds build 1.2 trillion dollar Treasury trade on borrowed money

Hedge funds have built a 1.2 trillion dollar Treasury trade on money that they must continuously borrow, CryptoSlate and CryptoRank both reported. According to CryptoSlate, the position allows financial companies to own large amounts of United States government debt without betting that bond prices will rise. [1][2]

CryptoSlate reported that hedge funds execute the Treasury basis trade by buying Treasury securities and simultaneously selling futures contracts against them. This structure allows funds to collect a small pricing gap between the two instruments. To make the return worthwhile, hedge funds borrow almost all of the money required for the bond purchases. [1]

Treasury basis trading is a specialized strategy that takes offsetting positions in a cash market instrument and a related derivative, such as a Treasury futures contract. The strategy seeks to exploit pricing discrepancies that are expected to converge over time. Hedge funds are pooled investment funds that use leverage and derivative instruments to manage risk and enhance returns. [3][4]

According to CryptoSlate, the government gains another buyer for its debt whose interest lasts as long as the trade pays. However, the reliance on borrowed money creates risks because the short term loans can expire quickly, leaving funds short of needed cash. [1]