Hedge funds have quietly built an $830 billion position in one of the oldest arbitrage strategies in fixed income. The Federal Reserve now says that trade is the primary engine behind the sector’s ballooning Treasury market footprint.
A June 2026 FEDS Note, drawing on SEC Form PF data, found that large hedge funds held $2.4 trillion in long US Treasury exposure as of September 2025. The basis trade, a strategy that pairs long cash Treasuries with short futures positions financed through the repo market, accounts for roughly 35% of that figure.
To put the scale in perspective: the $830 billion basis trade position has effectively doubled its pre-pandemic peak from early 2020. That earlier peak, of course, ended with the sort of market seizure that required the Fed to step in as buyer of last resort.
What the basis trade actually is, and why it matters
The basis trade exploits tiny price differences between Treasury bonds and Treasury futures contracts. When a futures contract trades at a slight premium to the underlying bond, hedge funds buy the bond, sell the future, and pocket the spread at expiration.
