Hedge funds use borrowed money to exploit pricing gaps between US Treasury bonds and futures contracts, a strategy known as the basis trade. Morgan Stanley estimated these positions at approximately $1.2 trillion, down 20% this year. The primary risk stems from repo market financing, where loans can expire overnight while trades require more time to become profitable. When borrowing costs rise or margin requirements increase, funds may be forced to sell urgently, amplifying price movements. Federal Reserve researchers estimated these positions at $830 billion in September 2025, a figure not directly comparable to Morgan Stanley’s estimate due to different methodologies.
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