A new paper from the Federal Reserve has identified the Treasury cash-futures basis trade as the primary driver behind the sharp increase in hedge fund exposure to US Treasuries, underscoring regulators’ ongoing focus on leverage and potential systemic risks in the market.

The analysis estimates that highly leveraged relative-value strategies, including the basis trade and swap spread arbitrage, account for nearly half of hedge funds’ $2.4 trillion in long Treasury positions as of September 2025.

According to the Fed, basis trade positions have expanded significantly since 2022, reaching an estimated $830 billion by September 2025, almost double their previous peak during the pre-pandemic period.

The basis trade involves buying Treasuries financed through the repo market while simultaneously shorting Treasury futures to capture small pricing discrepancies. While the strategy supports market liquidity and price discovery, policymakers have repeatedly warned that its high levels of leverage could amplify market stress during periods of volatility.

The findings add to a growing body of research suggesting that basis traders now account for the majority of hedge fund Treasury positions and a substantial share of repo market activity, reinforcing concerns over the potential impact of a disorderly unwind on broader fixed-income markets.