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Basis trade loses its bite as banks move in

Returns on popular hedge fund strategy dwindle to as little as three basis points, while dealers make use of softened capital rules to replicate the trade

Fish preapring to eat smaller fish unaware an even bigger one is about to eat him
Credit: Risk.net montage

The Treasury basis trade, as cynics like to say, is akin to picking up pennies in front of a steamroller. Except the pennies are getting harder and harder to find.

Returns in the popular hedge fund strategy have dwindled to a few basis points, as large dealers muscle in on the trade. Many firms are now questioning its viability.

“The basis trade is basically a very boring trade right now,” says a

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