Hedge Funds Unwind $200 Billion in Treasury Basis Trade Positions

Hedge funds have retreated from the Treasury basis trade, unwinding more than $200 billion in leveraged positions in recent months. The strategy, which involves buying cash Treasuries while shorting futures to capture small price differences, has seen its profitability decline as spreads have narrowed.

The basis trade grew significantly in recent years, reaching a total leverage of approximately $1 trillion by mid-2026. Major firms including Millennium Management, Citadel, ExodusPoint, and Capula Investment Management had built substantial positions in the strategy.

As of September 2025, hedge fund basis trade positions totaled roughly $830 billion, accounting for about 35% of their $2.4 trillion in total long Treasury exposure. By early 2026, hedge funds held approximately $2 trillion in Treasuries, representing 7% of the total Treasury market, a figure that doubled over five years.

The strategy relies on high leverage, sometimes exceeding 50 to 1, to turn minuscule spreads into significant returns. However, factors such as geopolitical tensions, increased government debt issuance, and changing corporate borrowing patterns have altered the risk-reward profile of the trade.

While rapid unwinds of this strategy have previously caused market stress, such as in March 2020, the current reduction is described as orderly. Funds are scaling back due to declining profitability rather than forced liquidations or margin calls, with lower repo funding activity and reduced net short futures positions indicating the shift.