Hedge Funds Could Shrink Treasury Positions With Swap-Spread Trades

Hedge funds could shrink Treasury positions tied to basis trades while keeping leveraged rate exposure if they shift risk capital to swap spreads, potentially changing their footprint in the $28.9 trillion market.

The analysis's authors, Matthew McCormick, Srini Ramaswamy and Hugo De Vere, describe a shift in risk budgets from basis trades to swap-spread wideners. They say the change could lower aggregate Treasury futures notional and the cash Treasury and repo positions that accompany the basis trades being replaced. “Even modest reallocation of risk capital from basis trades to swap spreads can produce an outsized decline in aggregate Treasury futures notional,” they wrote.

A basis trade pairs a long Treasury position with a short position in related Treasury futures, seeking to capture a price gap between them. Funds often finance the Treasury leg through repo borrowing. A swap-spread widener pairs a long Treasury with a pay-fixed interest-rate swap. The economists say front-end swap-spread trades recently offered risk-adjusted carry close to a long basis position, while carrying more dollar risk for each unit of notional. A fund could therefore use a smaller trade to take a comparable amount of risk.

Long-end yields moving toward 6% have also made bonds eligible for delivery into Treasury futures contracts more alike, reducing the value of the delivery option built into the basis trade.

Hedge funds held an estimated $2 trillion in cash Treasurys at year-end 2025, nearly triple their holdings five years earlier. That estimate put the funds at a record 7% share of the market, which had $28.9 trillion in marketable Treasury debt. The $2 trillion figure is an estimate because hedge fund filings do not report cash holdings separately.

A separate estimate for September 2025 put large hedge funds' long Treasury exposure at $2.4 trillion. Basis positions accounted for about $830 billion and swap-spread positions about $305 billion, nearly half of long exposure combined. Those figures measure exposure at a different date, so they are not directly comparable with the year-end cash-holdings estimate.

Swap-spread positions fell by an estimated $60 billion, or 20%, in April 2025, followed by another $40 billion in May. The estimated position had returned to about $305 billion by September. The analysis does not identify specific funds that have changed strategies or quantify any resulting decline in Treasury demand.