Hedge funds and the Treasury cash-futures basis trade

Daniel Barth and R. Jay Kahn

Journal of Monetary Economics, 2025, vol. 155, issue C

Abstract: This paper studies hedge funds’ arbitrage positions in the Treasury cash-futures basis trade, which profits from the disconnect between cash and futures prices. At times, the trade has surpassed $1 trillion in gross exposures. Basis traders consistently account for more than 60% of all hedge fund Treasury positions and 70% of all hedge fund repo. We show how frictions can introduce a positive association between arbitrage quantities and spreads, and how these frictions may propagate stress in the Treasury market during periods of instability such as in March 2020.

Keywords: Treasury markets; Hedge funds; Limits to arbitrage; Financial stability; Liquidity (search for similar items in EconPapers)
JEL-codes: E43 G12 G13 G23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:155:y:2025:i:c:s0304393225000947

DOI: 10.1016/j.jmoneco.2025.103823

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