Hedge funds have reduced their exposure to the Treasury basis trade by more than $200 billion in recent months. This strategy, which involves leveraging positions to profit from small price differences between cash Treasuries and futures contracts, has seen its profitability decline as spreads narrowed.
By mid-2026, the total leverage linked to this trade reached approximately $1 trillion. Major firms, including Millennium Management, Citadel, ExodusPoint, and Capula Investment Management, had established significant positions in the strategy.
As of September 2025, basis trade positions totaled about $830 billion, accounting for 35% of the $2.4 trillion in total long Treasury exposure held by hedge funds. By early 2026, hedge funds held $2 trillion in Treasuries, representing 7% of the market.
The current reduction in positions is described as an orderly process driven by lower profitability rather than liquidity crises. Indicators such as decreased repo funding activity and lower net short futures positions confirm the decline in the strategy's usage.
