hedge funds looking to profit from dislocations in the us treasury market appear to be playing with the very fire that burned them so spectacularly in the depths of the pandemic turmoil a recent surge in leveraged positions betting that treasury futures will fall at a time when wall street is increasingly confident that a us recession will soon spur rapid central bank interestrate cuts smacks of socalled basis trading market watchers say that’s when hedge funds seek to profit from a mismatch in pricing between treasury futures and the deliverable note or bond the trade usually earns tiny nominal returns so funds use cash borrowed from the repurchase agreement market to leverage up positions and juice their wagers the worry is that this is the same strategy that heaped steep losses on investors in march 2020 drying up liquidity not just in treasuries but also in other money markets key to the smooth functioning of the financial system here are some charts that illustrate the concerns the current environment favors buying the cash bonds and selling futures against them thanks to strong assetmanager demand for the derivatives and an increased public supply of treasury securities as the federal reserve sheds its holdings this kind of basis trading can distort how speculators respond to economic data making it harder for other investors to read signals from the bond market as a guide to the us outlook read more popular hedgefund trade seen behind treasury futures crowding adding to concern is the fact that general trading conditions are poorer now than back in march 2020 a bloomberg gauge of treasurymarket illiquidity has been hovering near levels last seen at the peak of the pandemic for the better part of the past year read more how a little known trade upended the us treasury market the one thing that is clear is that wagers on treasury futures are near the highest they’ve ever been indeed open interest in the pivotal fiveyear futures is at a record despite the haven appeal of treasuries the recent tumult in the us banking system showed just how painful getting caught wrongfooted on rates can be