The US Treasury basis trade, a strategy involving leveraged positions in government bonds and futures, has reached its lowest level in over two years. According to Morgan Stanley data, the notional value of these positions dropped from $1,26 trillion at the start of 2026 to approximately $900 billion by September 2026.
This reduction represents a decline of more than $300 billion within a single year. Hedge funds have unwound over $200 billion in leveraged positions during this period. Major market participants involved in this strategy have included Millennium Management, Citadel, ExodusPoint, and Capula Investment Management.
Citigroup strategist Jason Williams attributes the contraction to a narrowing set of market opportunities rather than financial distress. The strategy, which relies on borrowing to amplify returns from small price gaps, previously saw positions grow from roughly $830 billion in September 2025 to a peak in early 2026.
The decline in basis trading activity reduces demand for physical Treasury bonds, a shift monitored by the Federal Reserve and the Treasury Department. Regulators have tracked this market segment closely since March 2020, when a rapid liquidation of such positions caused significant instability in the Treasury market.
