Hedge funds are expanding basis trades, data suggests

investmentnews.com:

A surge in short sales of US Treasury futures suggests hedge funds are expanding basis trades, a popular tactic that may be injecting leverage into a bond market whipsawed in the wake of this month’s selloff. 

The revival of the trade — which exploits price differences between futures and underlying bonds — was likely behind the positioning by hedge funds up to Aug. 22, when the latest Commodity Futures Trading Commission data shows their short positions swelled to over 6 million 10-year-note futures equivalents. Asset managers are net long to a similar degree. 

The positioning data indicates an inrush into basis trades just as the most recent Treasury selloff was cresting, pushing 10-year yields to the highest since the before 2008 credit crisis. The proliferation of such leveraged strategies could exacerbate the market’s volatility, as happened in previous cases when they were rapidly unwound. 

Bank of America Corp. strategists said this week that momentum strategies, which also rely on leverage to amplify returns, are also likely on the rise.  

Meanwhile, asset managers’ long positions reflect continued inflows into Treasury funds and buying during the latest backup in yields, according to Bank of America. That type of dip buying — as well as purchases to close out short positions — may have fueled the Treasury rally Tuesday following a report showing that job openings declined at a sharper-than-expected pace.

Yet there appears diminished conviction about were yields are heading. The latest JPMorgan Chase & Co. Treasury client survey up to Aug. 28 shows a reduction in both long and short positions, with neutrals the most elevated in over a month. 

Meanwhile, block-trade activity continues to soar with focus on the