Relative value trades face Treasury clearing squeeze

SEC’s clearing proposals may hurt levered basis trades and worsen illiquidity in off-the-run bonds

The Treasury basis trade has become a go-to strategy for hedge funds looking to exploit pricing wrinkles in rates markets. The trade hinges on wafer-thin differences between cash bonds and Treasury futures.

Now, the arbitrage opportunity may be about to shrink even further.

A move by the US securities regulator to force firms to clear Treasuries has raised fears that relative value strategies such as the Treasury basis trade could become unprofitable. The extra costs incurred by mandatory