Basis Trade Has Ballooned to $1.5 Trillion, Morgan Stanley Says

The basis trade has swelled to roughly $1.5 trillion, underscoring the need to closely monitor its size to avoid a repeat of the market eruption seen in 2020, according to Morgan Stanley strategists.

The bank estimates the size of the strategy — employed by hedge funds to take advantage of small price gaps between Treasury cash markets and futures — has grown 75% since its 2019 peak. The size of the notional trade has outpaced the growth in Treasury bond issuance in recent years.