Hedge Fund Trade With a History of Blowups Is Back Again
- Firms aim to profit from gap between Treasury futures, bonds
- Strategy worsened liquidity crunch in 2020 as bets went awry
The US Treasury building in Washington, DC.
Photographer: Al Drago/BloombergThis article is for subscribers only.
Hedge funds looking to profit from dislocations in the US Treasury market appear to be playing with the very fire that burned them so spectacularly in the depths of the pandemic turmoil.
A recent surge in leveraged positions betting that Treasury futures will fall — at a time when Wall Street is increasingly confident that a US recession will soon spur rapid central bank interest-rate cuts — smacks of so-called basis trading, market watchers say. That’s when hedge funds seek to profit from a mismatch in pricing between Treasury futures and the deliverable note or bond.