The Office of Financial Research (OFR) published a brief entitled “Basis Trades and Treasury Market Illiquidity.”
The Treasury basis trade exploits the price difference between Treasury bonds and futures. The trade is exposed to financing and liquidity risks that can affect market liquidity.
This brief summarizes evidence on the size and extent of basis trading by hedge funds, and on whether these trades contributed to Treasury market illiquidity in March 2020.
.@OFRGov researchers used the OFR’s cleared repo data collection and other data on Treasury and futures markets to assess the risks basis trades present and their role in liquidity and price discovery across these markets. https://t.co/ty65aWm3jj
— Office of Financial Research (OFR) (@OFRgov) July 16, 2020
Timely intervention by the Federal Reserve in the Treasury and repurchase agreement markets may have limited the extent of spillovers that could affect financial stability.
The brief can be found here: https://financialresearch.gov/briefs/2020/07/16/basis-trades-and-treasury-market-illiquidity/
Source: OFR
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