Basis traders, taking advantage of small mispricings between US Treasury (UST) cash and futures, and using repo to finance the trade, have become an increasingly important part of the UST cash buyer’s market. Mandatory clearing of US Treasury repo has the potential to increase their costs, and a reduction in basis trading could exacerbate already strained market conditions if international buyers of US Treasuries decide to go elsewhere at the same time, among other potential events that would hinder liquidity.
The CME/FICC cross-margining arrangement for US Treasuries could provide enough of a new cost structure for basis traders that they stay in the market after June 2027, and that could have far-ranging beneficial impacts. On the other hand, a breakdown in the basis trade could lead UST markets in the other direction and potentially force central bank intervention.
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