How repo roll risk could spoil US Treasury basis trade

Financing worries emerge as popular trade becomes increasingly reliant on overnight repo

The financing leg of the surging US Treasury basis trade could prove to be its most vulnerable point, with leveraged investors increasingly using overnight rather than term repo to fund the cash portion of the arbitrage.

The basis trade sees hedge funds and proprietary trading firms (PTFs) buy Treasuries with repo financing and short the same bond with futures that are currently trading rich due to a surge in buying from US asset managers.

The previous incarnation of the trade, popular in early

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