Hedge funds built a $1.2 trillion Treasury trade on money they have to keep borrowing

Companies can own a mountain of US government debt without betting that bond prices will rise. Hedge funds buy Treasury securities and sell futures against them to collect a small pricing gap, borrowing most of the purchase money to make the return worthwhile.The government gets another buyer, whose interest lasts as long as the trade pays.The catch is that the loan can expire tomorrow while the trade needs longer to pay off. The government's ability to repay its debt doesn't solve the fund's need to repay its lender.This is the Treasury cash-futures basis trade, and the sums involved are large enough to reach well beyond the bond desk. Morgan Stanley estimated positions had fallen 20% this year to about $1.2 trillion, according to Sept. 24 reports.The bank hadn't found evidence of broad basis-related market stress at that point, so a smaller trade wasn't automatically a trade that would blow up.Hedge funds love small profits when it's someone else's moneyYou can buy a Treasury security outright, or trade a futures contract that sets terms now for a transaction completed later. The contract specifies which securities can be delivered against it, linking their prices without making ...