Key Highlights

• Fears of a cash-futures basis trade unwind have receded
• Expectations of regulatory relief pushed swap spreads lower, but we don’t think primary dealers will expand holdings
• Waning foreign participation in the UST market remains a concern

EXHIBIT #1:  THE CASH-FUTURES BASIS TRADE

_{Source: BNY Markets, Commodity Futures Trading Commission}

In recent weeks, there has been a great deal of concern over the potential unwind of the Treasury cash-futures basis trade, particularly during the period from April 4 through April 11, when U.S. 10y yields increased from 4% to 4.5% in just one week. Data since that episode confirm that the so-called “basis trade” is still intact and fears of an unwind were unfounded. 
 
The cash-futures basis trade is a common strategy employed by levered money managers to short Treasury futures and go long on their cash equivalents, looking to exploit misalignments in prices and earn arbitrage profits. This trade is heavily dependent on leverage and funding short positions by borrowing in repo markets. The volatility in funding markets that same week added to the concerns around the de-levering of this trade. 
 
Since then, data on shorting activity in the Treasury market reveal that instead of taking shorts off, leveraged funds have actually increased their short exposures across U.S. Treasurys. Exhibit #1 shows the evolution of this basis trade. We plot weekly data from the Commodity Futures Trading Commission on the commitment of traders for both leveraged investors and (long-only) asset managers. The latter usually are long Treasury futures, as a cheap and efficient way to gain UST exposure. The mirror-like images of the two lines illustrate the dynamics of this trade. While we deliberately show a lengthy time series, we note that in the most recent weeks, levered money’s short exposure actually increased from around 500k (net) contracts on April 1 to 508k contract two weeks later. 
 
Furthermore, BNY’s own shorting data, derived from its position as the largest securities lender in the world, show no material change in recent days in Treasury shorts across the curve. Since the beginning of the year, short exposure in the 7-10y segment of the curve (the top line in Exhibit #2) has actually increased from about 1.4% of total market cap to around 1.6% last week. Shorting of other maturities, as well as for all USTs has remained fairly steady

EXHIBIT #2: STILL SHORT TREASURYS

_{Source: BNY Markets, iFlow}

With calm having returned to funding markets and no evidence of a reversal of the cash-futures basis trade, the other part of the Treasury market that has garnered attention has been the abrupt collapse of swap spreads. For example, during the period between April 2 and April 8, the 10y SOFR swap spread fell nearly 15bp, while the 30y swap narrowed by a whopping 33bp. One purported driver of these moves was a growing expectation of regulatory relief via a relaxation of the Supplementary Leverage Ratio (SLR), which would allow large, systemically important banks to carry more Treasury risk on their books without incurring capital charges. 
 
Dealer positions in USTs are the most extended they have been since data have been kept (late 1990s), at over $400bn in outright holdings. In terms of total public debt outstanding, primary dealers hold 1.5%, also the highest observed (see Exhibit #3). We’re not sure that suspending or weakening the SLR will suddenly induce dealers to hold more Treasurys, even as expected issuance by the government is likely to increase in coming years.

EXHIBIT #3: DEALERS HOLDING MORE TREASURYS THAN EVER

_{Source: BNY Markets, Federal Reserve Bank of New York}

Returning to a subject also on market participants’ minds, last week we illustrated the ongoing retreat by cross-border real money investors from U.S. fixed income markets, including U.S. Treasurys (see here). 10y U.S. T-note yields reached just below 4.5% on April 11 as foreigners pulled out of the market. Indeed, For the week ending April 11, weekly cross-border flows from USTs were nearly one full standard deviation below normal, one of the biggest weeks of UST selling in several years. Last week’s outflows relented somewhat but were still negative (see Exhibit # 4). On a daily basis, eight out of the last 11 trading days (since April 4) saw selling.

EXHIBIT #4: STILL SELLING USTS

_{Source:  BNY Markets, iFlow}

Forward look

With increasing rhetoric from the administration admonishing the Fed to cut rates and the markets entertaining intensifying discussions about the possibility of replacing the Fed chair, we don’t expect a rush back into the market from abroad. Last Friday and this Monday were marked by the holiday-related closure of most major markets, so data for these two days are somewhat thin, but we’ll be looking for the possible resumption of outflows from the UST market in coming days. 
 
All of these concerns presented by observers and participants in the Treasury market are valid, but we think the one that is most relevant and likely to be sustained is the retreat by overseas investors from USD-based fixed income assets. The haven status of such assets is increasingly in question, and our data capture this trend clearly. We have been monitoring U.S. demand for Treasurys for a while now, and reiterating the message from Exhibit #1, we see that since the turn of the year, the majority of 2025 has featured cross-border selling.