Basis trade déjà-vu

Five charts to start your day

Leverage loves a sure thing. Hedge funds borrow against rock-solid US Treasuries, short the future, pocket basis points and call it lunch. Trouble is when volatility roars, margins spike and positions implode – just ask Long Term Capital Management in 1998 or the funds flayed in March 2020.

April’s shaky auctions triggered another scramble. Dealers demanded more collateral, funds trimmed eight hundred billion dollars of basis exposure and liquidity in off-the-run bonds thinned to levels not seen since the Covid-19 panic. The Fed stayed on the side-lines this time but the tremor was felt.