US Treasury Basis Trade Loses Appeal as Returns Shrink

The US Treasury cash-futures basis trade is losing appeal among hedge funds as shrinking returns fail to offset rising funding costs, according to market participants. Chris Horvatin, a managing director at Goldman Sachs, reports that clients increasingly view the basis as “dead” and less attractive than repo opportunities.

Why is the Treasury basis trade losing favor?

Tight spreads and increasing funding costs are driving the shift. According to market participants, the returns generated by the cash-futures basis trade are no longer sufficient to cover the costs required to fund the positions.

This imbalance has led hedge funds to reconsider the viability of the strategy. The trade relies on the price difference between cash Treasuries and their futures contracts, a gap that has narrowed.

Did You Know? Tight spreads and rising funding costs are the primary factors currently pushing the cash-futures basis trade out of favor with investors.

How does the trade compare to repo?

Market participants are now weighing the basis trade against repo options. Chris Horvatin of Goldman Sachs stated that many clients describe the basis as “dead” when compared to the opportunities available in repo.

The preference for repo suggests that funds are seeking more reliable or higher-yielding alternatives as the basis trade’s profitability declines.

Expert Insight: Samantha Carter notes that the shift away from the basis trade highlights a critical trade-off for hedge funds. When funding costs rise faster than the basis spread, the risk-reward profile collapses, forcing capital toward simpler instruments like repo.

What may happen next for hedge funds?

If returns continue to shrink, hedge funds may further reduce their exposure to the cash-futures basis trade. A possible next step could involve a broader migration of capital into repo markets if the funding cost gap persists.

Back to basis: Why the Treasury basis trade is in focus

Market participants may also wait for spreads to widen before returning to the strategy, though this depends on future funding environments.

Frequently Asked Questions

Why is the US Treasury basis trade losing its appeal?
Shrinking returns are struggling to offset the rising cost of funding, according to market participants.

What have Goldman Sachs clients said about the trade?
According to Chris Horvatin, a managing director at Goldman Sachs, many clients believe the basis is “dead” and no longer offers an attractive opportunity compared to repo.

What specific factors are pushing the trade out of favor?
The decline is driven by tight spreads and rising funding costs.

Do you think rising funding costs will permanently change how hedge funds approach Treasury trades?