Hedge Funds Shift Capital to Swap-Spread Arbitrage Strategies
US Treasury investors are moving capital from cash-futures basis trades into swap-spread arbitrage as rising yields and financing costs limit traditional strategies.
Investors in the US Treasury market are diversifying their relative-value strategies, shifting capital from the cash-futures basis trade into swap-spread arbitrage. In the basis trade, hedge funds buy cash Treasuries using borrowed repo market funds while selling futures. This strategy has plateaued recently due to rising Treasury yields, increased financing costs, and regulatory changes that enable banks to hold more Treasuries.
Hedge funds are increasingly targeting swap-spread wideners, which are wagers on the gap between Treasury yields and SOFR-linked swap rates. The Federal Reserve Bank of Dallas San Antonio Branch warned that these swap-spread positions carry higher dollar risk per unit of notional value than the traditional basis trade. Chase Bank reported that speculative activity has extended into these alternative strategies as the market evolves.
Despite the shift, the basis trade remains the dominant market strategy. Data from the United States Federal Reserve Board of Governors indicates that as of September 2025, hedge funds held approximately $830 billion in basis positions, compared to $305 billion in swap-spread positions. Some market participants expect the basis trade to regain momentum as government borrowing continues to grow, while the CME Group has reported record-level overall Treasury futures volumes.
