CME Group, the world's largest derivatives exchange operator, announced on the 9th (local time) the introduction of Treasury Link, a new product designed to simplify basis trades favored by hedge funds. The product converts the current multi-step process of purchasing US Treasuries and taking short positions in corresponding futures into a single electronic transaction, aiming to reduce costs and eliminate volatility risk between the two trades. Basis trades have grown rapidly in recent years but remain controversial due to massive leverage employed by large hedge funds, with the Federal Reserve estimating such positions reached $830 billion as of September last year—double the previous peak recorded in 2020—while regulators have closely monitored the trades following market disruptions during the March 2020 pandemic.
Treasury Link Combines Treasury Purchase and Futures Short Selling
Treasury Link converts the current multi-step process of purchasing US Treasuries and taking short positions in corresponding futures into a single electronic transaction. The product enables both trades to be executed simultaneously. CME Group stated the product eliminates volatility risk that occurs between the two trades and reduces the need for brokers.
Basis Trade Positions Reached $830 Billion as of September Last Year
Basis trades have grown rapidly in recent years. Large hedge funds employ leverage sometimes exceeding 100 times to profit from minor differences between Treasury prices and corresponding futures contract prices. According to Federal Reserve estimates, such betting positions reached $830 billion as of September last year, double the previous peak recorded in 2020. The trades are controlled mostly by a small number of large hedge funds, according to reports.
March 2020 Pandemic Triggered Rapid Position Unwinding
Massive leverage involved in basis trades has shocked markets at times. When global markets collapsed in March 2020 during the coronavirus pandemic, rapid unwinding of basis trade positions shook the Treasury market. Regulatory authorities have closely monitored the trades since then. Basis trades showed high sensitivity to geopolitical shocks. When the Donald Trump administration announced reciprocal tariffs last year, positions unwound dramatically, causing US 10-year Treasury yields to swing 60bp over one week.
CME Claims Product Reduces Multi-Part Transaction Risk
CME Group argued the product launch reduces market risk. The company explained the product reduces risks inherent in multi-part transactions and expands the investor base, making pricing more efficient in both markets and narrowing the basis between them. CME stated the product allows traders to enter trades more easily when spreads widen between US Treasury spot and futures markets, reducing market contagion risk from rapid deleveraging.
FAQ
What did CME Group announce on the 9th (local time)?
CME Group announced the introduction of Treasury Link, a new product that converts the multi-step process of purchasing US Treasuries and taking short positions in corresponding futures into a single electronic transaction.
How large were basis trade positions as of September last year?
According to Federal Reserve estimates, basis trade positions reached $830 billion as of September last year, double the previous peak recorded in 2020.
