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Basis Trades and Treasury Market Illiquidity

Author

Listed:
  • Daniel Barth

    (Board of Governors of the Federal Reserve System)

  • Jay Kahn

    (Office of Financial Research)

Abstract

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. 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.

Suggested Citation

  • Daniel Barth & Jay Kahn, 2020. "Basis Trades and Treasury Market Illiquidity," Briefs 20-01, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:briefs:20-01
    as

    Download full text from publisher

    File URL: https://www.financialresearch.gov/briefs/files/OFRBr_2020_01_Basis-Trades.pdf
    File Function: First version, 2020
    Download Restriction: no
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Making the Treasury Market Resilient
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2020-08-19 11:50:39

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Ron Alquist & Karlye Dilts Stedman & R. Jay Kahn, 2022. "Foreign Reserve Management and U.S. Money Market Liquidity: A Cost of Exorbitant Privilege," Research Working Paper RWP 22-08, Federal Reserve Bank of Kansas City.
    2. Fernando Eguren Martin & Mark Joy & Claudia Maurini & Alessandro Moro & Valerio Nispi Landi & Alessandro Schiavone & Carlos van Hombeeck, 2020. "Capital flows during the pandemic: lessons for a more resilient international financial architecture," Questioni di Economia e Finanza (Occasional Papers) 589, Bank of Italy, Economic Research and International Relations Area.
    3. Vissing-Jorgensen, Annette, 2021. "The Treasury Market in Spring 2020 and the Response of the Federal Reserve," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 19-47.
    4. Miguel Fernandes & Mario Pascoa, 2024. "Repo, Sponsored Repo and Macro-prudential Regulation," School of Economics Discussion Papers 0224, School of Economics, University of Surrey.
    5. He, Zhiguo & Nagel, Stefan & Song, Zhaogang, 2022. "Treasury inconvenience yields during the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 143(1), pages 57-79.
    6. Di Gangi, Domenico & Lazarov, Vladimir & Mankodi, Aakash & Silvestri, Laura, 2022. "Links between government bond and futures markets: dealer-client relationships and price discovery in the UK," Bank of England working papers 991, Bank of England.
    7. Linas Jurksas & Deimante Teresiene & Rasa Kanapickiene, 2021. "Liquidity Spill-Overs in Sovereign Bond Market: An Intra-Day Study of Trade Shocks in Calm and Stressful Market Conditions," Economies, MDPI, vol. 9(1), pages 1-22, March.
    8. Sirio Aramonte & Andreas Schrimpf & Hyun Song Shin, 2023. "Non-bank financial intermediaries and financial stability," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 7, pages 147-170, Edward Elgar Publishing.
    9. Jason Allen & Ali Hortaçsu & Eric Richert & Milena Wittwer, 2024. "Entry and Exit in Treasury Auctions," Staff Working Papers 24-29, Bank of Canada.
    10. Ari Kutai & Daniel Nathan & Milena Wittwer, 2024. "Exchanges for government bonds? Evidence during COVID-19," Bank of Israel Working Papers 2024.03, Bank of Israel.

    More about this item

    Keywords

    Treasury; repurchase agreement; futures; basis trade; hedge fund; securities dealers; liquidity;
    All these keywords.

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