Basis Trades and Treasury Market Illiquidity

Daniel Barth and Robert Kahn
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Daniel Barth: Board of Governors of the Federal Reserve System

No 20-01, Briefs from Office of Financial Research, US Department of the Treasury

Abstract: The Treasury basis trade exploits the price difference between Treasury bonds and futures. The trade is exposed to financing and liquidity risks that can affect market liquidity. This brief summarizes evidence on the size and extent of basis trading by hedge funds, and on whether these trades contributed to Treasury market illiquidity in March 2020. Timely intervention by the Federal Reserve in the Treasury and repurchase agreement markets may have limited the extent of spillovers that could affect financial stability.

Keywords: Treasury; repurchase agreement; futures; basis trade; hedge fund; securities dealers; liquidity (search for similar items in EconPapers)
Pages: 18 pages
Date: 2020-07-16
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Citations: View citations in EconPapers (12)

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https://www.financialresearch.gov/briefs/files/OFRBr_2020_01_Basis-Trades.pdf First version, 2020 (application/pdf)

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