Plumbing Notes: The Basis Trade Scare
the latest on the most systemically important bond market trade
Money Market Commentary: The Basis Trade Scare
Regulators and commentators have, once again, started to talk about the basis trade — a shorthand for the cash-futures basis trade (illustrated by Conks above), the primary glue holding UST (U.S. Treasury) cash, futures, and repo markets together, fueling the most efficient sovereign bond market on the planet. Data on basis trade activity remains scarce, but it is likely to exceed $1 trillion in exposure. Subsequently, as hedge fund leverage reaches new heights, monetary leaders have grown nervous. So anxious, in fact, that many media and financial commentators have started to join in. The outcome has been a series of posts and articles that have overlooked the recent evolution in the most systemically important trade and instead focus on potential market doom. The cash-futures basis trade “scare”, however, remains overblown.