Bailed-out basis traders face regulatory backlash

The cash/futures basis trade could be a test case for regulating systemically risky activities

For many fixed income traders, the defining market event of the Covid-19 crisis was the mass unwinding of bond/futures basis trades by levered hedge funds, which sent shockwaves through an already glutted US Treasury market in March. 

The sudden surge in volatility upended the arbitrage between bonds and futures and triggered margin calls on a scale not seen in a decade. As hedge funds rushed for the exits, bid-ask spreads in off-the-run US Treasuries, which are typically a fraction of a basis