Office of Financial Research: Basis Trades and Treasury Market Illiquidity

The Treasury futures basis trade seeks to exploit the price difference between cash Treasury securities and Treasury futures. This brief summarizes evidence on the size and extent of basis trading by hedge funds and assesses the possibility that the trade’s exposure to financing and liquidity risks contributed to Treasury market illiquidity in March 2020. This brief also highlights the potential for the trade to lead to further illiquidity. While we find that Treasury illiquidity in March placed stress on Treasury basis trades, the evidence casts doubt on the theory that stress in these trades amplified Treasury market illiquidity. Intervention by the Federal Reserve in the Treasury and repo markets may have limited spillovers that could affect financial stability.

The full paper is available at

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