Board of Governors of the Federal Reserve System

Figure 1. Option-Adjusted Treasury Cash-Futures Bases, Net of Carry, Active Contracts

Figure 1 plots the Treasury cash-futures bases of the 2-, 5-, and 10-year futures contracts and highlights periods of basis trade activity. Two basis trade periods are highlighted: between March 2018 and March 2020, and between August 2022 and the present. The x-axis of the chart starts at the beginning of 2017 and ends in December 2023. The y-axis denotes the annual percentage return of a treasury cash futures basis trade for the 2- (black line), 5- (dotted blue line), and 10-year (dashed red line) futures contracts. The three lines fluctuate around 0 in 2017, 0.2 percent between 2018 and early-2020, fluctuate around 0 between mid-2020 and mid-2022, and fluctuate between 0.1 and 0.5 thereafter. The line for the 2-year cash futures basis is largest since mid-2022 fluctuating around 0.3.

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Figure 2. Leveraged Funds’ Short Positions in Treasury Futures

Figure 2 plots total short Treasury futures positions of leveraged funds broken down by futures contract tenor. The x-axis of the chart starts at the beginning of 2017 and ends in December 2023. The chart is split into four different colors stacked on top of each other in the same order as the key. The combined volume increases from around 250 billion USD in 2017 to around 800 billion USD in 2019 before decreasing again to roughly 400 billion by the end of 2021. Starting in mid-2022 notional positions by leveraged funds increases rapidly and reaches 1 trillion USD by the end of 2023. Positions of the 2-, 5-, 10, and long treasury futures contracts make up roughly 40%, 30%, 20% and 10% of the total volume, respectively, throughout the whole time series.

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Figure 3. Estimated Net Cumulative Treasury Purchases by Hedge Funds

Figure 3 plots the estimated net cumulative Treasury purchases by hedge funds, in billions of USD, since 2017Q3. The x-axis of the chart starts in September of 2017 and ends in September 2023. Bars are reported for every month and split by funds that are likely basis traders and other hedge funds. In 2018 the net cumulative Treasury purchases of likely basis traders (solid blue bars) increases from net-zero to around 400 billion by mid-2019 and holds steady around 300 billion until early 2020 when the net-cumulative Treasury purchases decrease to around 100 billion. In mid-2022 net cumulative Treasury purchases of likely basis traders begin to increase and in mid-2023 they rapidly increase to around 500 billion by September 2023. Other hedge funds (dashed grey bars) have near zero net cumulative Treasury purchases for most of the history except between 2020 and the end of 2022 when net-purchases are roughly negative 100 billion. In 2023 net-cumulative Treasury purchases of other hedge funds increased to around 100 billion.

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Figure 4. Estimated Net Treasury Purchases by Basis Traders and Other Hedge Funds

Figure 4 plots the month to month change in estimated net cumulative treasury purchases by hedge funds in billions of USD. The x-axis of the chart starts in September of 2017 and ends in September 2023. Bars are reported for every month and split by funds that are likely basis traders and other hedge funds. Key takeaways are a large sell off in Treasuries by basis trading funds in March and April of 2020 and that basis trading hedge funds on-net purchased roughly 50 billion in Treasuries in most months in 2023 as they did in late 2018 and early 2019.

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Figure 5. Hedge Fund Net Repo Positioning

Figure 5 plots the change in net-repo positions of qualifying hedge funds since 2017Q1 in billions of USD. The x-axis of the chart starts at the beginning of 2017 and ends in September 2023. The line moves in tandem with the leveraged funds’ short positions in Treasury futures chart above, increasing from 0 in early 2018 to roughly 500 billion in mid-2019 and decreasing to 400 billion in early 2020 and to 100 billion and then 0 in 2021. In mid-2020 the line increases from 0 and reaches roughly 600 billion by September 2023.

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Figure 6. TRACE Proxy for Basis Trading

Figure 6 compares the TRACE Proxy with the NetRepo measure and leveraged fund short futures positions in contracts with tenors less than or equal to ten years. The x-axis of the chart starts at the beginning of 2017 and ends in December 2023. The Y-axis, in billions of USD. The TRACE Proxy, NetRepo, and leveraged fund short futures positions in the 10-year and shorter tenor futures contracts are all plotted. The NetRepo line (dotted blue line) is the same as the above chart, and the line for leveraged fund short futures positions in the 10-year and shorter tenor (dashed red line) is roughly the same as the above chart. The TRACE Proxy (solid black line) starts in 2019 around 500 billion and slowly decreases to 0 by the end of 2021. In mid-2022 the TRACE Proxy starts to increase and ends the sample at roughly 350 billion.

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