Hedge funds pull back on Treasury basis trade as spreads dry up

For years, the Treasury basis trade was the quiet money machine humming in the background of hedge fund portfolios. Buy cash Treasuries, short the corresponding futures contract, pocket the tiny spread between them, and crank up the leverage until that tiny spread becomes a very large pile of money. Hedge funds have pulled back more than $200 billion in leveraged positions from the Treasury basis trade in recent months, a retreat that some market participants are calling the effective death of the strategy. The culprit is straightforward: the spreads that made the trade profitable have narrowed to the point where even massive leverage can’t squeeze out attractive returns. How big this trade actually got As of September 2025, hedge funds’ basis trade positions sat at approximately $830 billion. That represented roughly 35% of their total long Treasury exposure of $2.4 trillion, a figure that had nearly doubled from early 2020 levels. By mid-2026, the total leverage associated with the trade had swelled to around $1 trillion. The names involved read like a who’s who of the hedge fund world: Millennium Management, Citadel, ExodusPoint, and Capula Investment Management all built signif...