The unknown risk on the flip side of the basis trade

US mutual funds have amassed record notionals in Treasury futures that in some cases exceed their AUM

Credit: Stephen Lee, www.nbillustration.co.uk

Hedge funds have been the main protagonists in a popular narrative this year – that the ever-expanding, and highly leveraged, basis trade might implode and take the US Treasury market with it. There are two sides to every story, though. And as hedge funds’ short positions in US Treasury futures have ballooned since the tail end of last year, so too have futures notional exposures at asset managers – the firms that largely make up the other side of the trade. 

US mutual bond funds are holding more

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