Basis trade positions, a strategy of trading the spread between cash Treasuries and their underlying futures could be on the slide as hedge funds unwind their short Treasury futures bets, according to a report by Bloomberg citing a Bank of America note.
The report cites strategists at Bank of America as saying that the positioning shift is partly down to asset managers switching their attention to investment-grade credit.
In a note issued on 11 March, bank strategists including Meghan Swiber wrote: “The reduction in UST futures could be driven by a combination of reduction in duration longs and/or funds pivoting from UST futures to IG credit, given the extent of recent issuance and demand for the product.”
According to CFTC data up to 5 March, the net short-duration positioning overall among leveraged accounts has now dropped for five consecutive weeks, which amounts to a combined 850,000 10-year note futures equivalents, or roughly $57 per basis point in risk. Net long positioning has unwound by about 800,000 10-year futures equivalents over the same period.
Hedge fund short covering in 10-year note contracts was the biggest seen in the last week, with net buying of $7.4m per basis point of risk.
