The hedge fund basis trade has ballooned to around $1.5tn, a 75% increase since its 2019 peak, according to a report by Reuters citing Morgan Stanley strategists, raising concerns over potential market stress if positions need to be unwound rapidly.

The trade, which exploits small price gaps between Treasury cash bonds and futures, has outpaced the growth of Treasury issuance.

Morgan Stanley highlighted heightened risk in five-year, ultra-long, and 10-year futures, noting that concentrated activity in the belly of the yield curve has increased. Strategists warn that, as in 2020, a sudden reversal could strain dealers and funding markets, emphasising the need for close monitoring amid tight liquidity conditions.