Hedge-Fund Trade That Upended the Treasury Market Is Set to Return
- Relative-value opportunities emerge as Fed shrinks footprint
- Older Treasury notes and bonds have seen some value erode
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A money-making strategy formerly popular among hedge funds stands to make a comeback as the Federal Reserve plots to shrink its footprint in the U.S. Treasury market.
The strategy involves taking leveraged positions in Treasury notes and bonds in order to exploit price differences with the corresponding futures contracts. These so-called basis trades backfired during the March 2020 liquidity crisis, when the normal relationships between cash and futures broke down.