Prompted by a call from an old friend enquiring about a piece on cash/futures basis from way back in November 2024 I thought it would be interesting/useful to look at where this trade may have spread internationally. When the Bank of England publicly worried about the cash/futures basis trade in US Treasuries in 2023 a few of us scratched our heads. We should have realised that when a man comments on another’s difficulties, he is worried the same dangers may afflict him. Sure enough, the basis trade is now no longer confined to the United States. Available evidence suggests it is prominent in the UK, Europe and Canada and (with different characteristics) may be evident in Australia and China and probably Japan. Our analysis tentatively suggests the trade may be relatively large in these other areas when compared to local market liquidity measures. This piece will be followed by a companion piece on why the basis trade had to emerge to intermediate the regulatory and fiscal conditions that emerged post-GFC, and especially post-COVID. Which prompts the question: is the basis trade benign, or dangerous, or both?
We’ve previously written a lot on the US Treasury cash/futures basis trade: here and here. That’s because the US has by far the biggest exposure to the trade and provides by far the best data to quantify its risks – and rewards. It is possible (more-or-less) to get a near-real-time assessment of Treasury basis performance simply by obsverving published figures. After a reduction in exposure at the beginning of 2025, following dislocations at year-end, the US version of the cash/futures basis has resumed and is again approaching record levels of risk. Although we heard reports of dislocation in the trade following ‘Liberation Day’ (April 2nd) this is not shown in the net positioning of leverage funds in CFTC data. We suspect it was largely fear-mongering.
Unfortunately, the same detailed clarity on basis trade holdings is not available outside the United States.
What we do know is the influence of hedge funds in government bond markets, futures and repo is a growing everywhere, and that the combination of interest is accompanied by increased exposures in basis trading.
Trade venues such as Tradeweb reflect this increasing activity.
The Office of Financial Research reported: “Hedge fund repo borrowing increased so significantly during the past two years because hedge fund investments in Treasury and foreign sovereign debt increased. This growth is primarily due to cash-futures basis, cash-swap basis, and yield curve trades, which all involve repo financing.”
Hedge fund holdings of Treasuries and foreign sovereign bonds have followed a similar rising trend in the last decade. It would be natural to conclude that profitable strategies such as cash/futures basis, responsible for much of the large rise in Treasury holdings, is also responsible for the rise in foreign holdings.
We should point out the gross holdings include longs and short positions, and cover cash bonds and derivatives, meaning an increase in the basis trade would show as an increase in gross holdings.
The gross holdings do not tell us how large the basis trade is in foreign markets. In the US, various metrics can be used including usage of DVP repo and COTR reports which suggest it may have a face-value of around $1 trillion – see below.
If similar relationships hold for sovereign holdings (and we believe they do not hold) it suggests the foreign basis trade (or similar) may have face values between $500 billion and $700 billion. However, we have almost no confidence in this number. Attempting a bottom-up sum from different jurisdictions suggest foreign basis trade may be considerably lower; perhaps amounting to $150 billion. Nevertheless, the markets in which the trade is placed are considerably less liquid than the Treasury market.
Where are non-Treasury basis trades concentrated? The main markets appear to be UK, Euro-area and Canada. The data is not clear on activity in Japan, and if anyone has any detail, please let me know. Australia is another possible venue, though the lack of a deliverable market means a similar trade (Exchange for Physical) may take the place of the basis trade. In the course of the research I discovered the basis trade is active in China – though drivers are entirely different and do not appear to involve hedge funds.
United Kingdom
Hedge funds have significantly increased activity in the UK gilt market. Some claim hedge funds accounted for 60% of trading volume in UK government bonds on TradeWeb in early 2025. The Bank of England reported in April that hedge funds made up “27% of weekly dealer-client volumes thus far in 2025, compared to around 17% in 2018”. The same report went on: “Hedge funds played an important role in intermediating between different types of market participants, thus improving market liquidity and efficiency in good times.” This is code for the cash/ futures basis trade among other strategies. We estimate the size of the basis trade to be at least £26 billion (US$35 billion).
The size could be considerably larger if expansion of hedge fund usage of repo in the UK is a guide. The same report commented: “The FPC noted that much of the recent increase in leverage could be accounted for by hedge fund net gilt repo borrowing, which had increased from £4 billion at the start of 2024 to £61 billion as of March 2025. This was within the top percentile of the historical distribution of hedge fund net positioning (going back to 2017), with much of the borrowing concentrated in a small number of funds.”
The Bank of England report also noted: “these trends were not specific to the UK, as increased hedge fund activity and repo borrowing had been a theme in government bond markets in other jurisdictions… Other central banks, including the Bank of Canada and the European Central Bank, had also highlighted the use of repo leverage to finance basis trades in government bond markets.”
It would be helpful to provide a chart of net Gilt futures positions by investor type. The public can see the net Gilt futures positions of hedge funds and asset managers, which are published by the exchange where they trade (ICE Europe). We can draw conclusions from the data. But to get to that data you have to tick a box to say you agree with the following: “in order to receive the proprietary data from this website, you acknowledge and agree that you shall not disclose, transmit, distribute or disseminate, either directly or indirectly through any third parties, the market data and information contained herein to any person or entity without the express written consent of ICE Data Services.” The net position of futures are indeed market data, which makes discussion of the basis trade in UK Gilt futures somewhat harder.
The proscription seems entirely idiotic. Why publish the data if you won’t allow public discussion of it? If you wish to see the extent of the basis trade in UK, visit the ICE COTR website and do your own charting of net positions for different investor types. The result is clear.
European Union
In Europe foreign hedge funds have assumed a big part in EGB markets. Tradeweb data reported by the ECB showed “hedge funds roughly doubled their volumes of EGB transactions in secondary markets from 2018 to 2023. According to this data, hedge fund activity represented 56% of volumes in the secondary market in 2023, up from 26% in 2018.”
Relative cheapening of European government bonds has aligned the direction of the European basis trade with the US, so it would make sense to expect this trade to increase.
It has been suggested that during 2024 the ratio of net long cash bond positions versus net short positions held by hedge funds flipped from -1.4 (40% more shorts than longs) to +1.4% (40% more longs than shorts), driven by the “positive carry opportunities against futures (the so called “basis trade”)”
The ECB has noted “Offshore hedge funds, believed to also be involved in basis trades in the United States, have become increasingly present in the euro area government bond repo market, with their positions growing up to threefold since the beginning of 2021“ – see panel a below. The rise in repo activity is taken as a growing involvement of the basis trade. One could also point to a clear reduction in net long futures positions (probably meaning a growing proportion of short positions) reported by hedge funds in EGBs (panel c below).
Based on these metrics, and assuming a growth in Euro-govvie basis trades in line with those elsewhere we estimate the total size to be EUR35 billion, with the majority concentrated in German bond futures.
Canada
In Canada the cash/futures basis trade has grown significantly over the past two years, mirroring trends seen in the US, Europe and UK. The BoC’s Financial Stability Report of April 2024 devoted considerable space to considering the local basis trade. This year’s report did not do so, but that may have been because it was overshadowed by disruptions from ‘Liberation Day’, which occurred just prior to the release of the report.
So, I rely on the earlier report for quantification. In 2024, monthly trading volumes in the Canadian basis trade reached $51 billion, representing about 8% of total government bond trading volume. That’s small beer compared to the Treasury basis trade, but it is a considerable presence in the underlying cash bond market. Moreover, it may be using the wrong metrics.
A turnover of C$51 billion may or may not reflect total daily exposure. In the US, most repo financing for basis trading is conducted on an overnight basis. That may not be the case in Canada, but if it is it would mean the comparator should be C$50bln against average daily volumes of bond trading, not average monthly volumes. That would reveal a much higher exposure relative to the liquidity of the cash bond market. It is this higher figure we use in this piece.
The Montreal Exchange publishes monthly reports on trading activity and explicitly references turnover of ‘exchange for physical’ trades. These trades are one form of cash/futures basis and regularly account for between 15–23% of total volume in underlying average daily volume of bond futures on the exchange, concentrated in the shorter maturity 2year and 5year contract.
We estimate current exposures to cash/futures basis in Canada to be in the order of C$50 billion.
Other Places
Japan: Foreign investors have come to dominate the JGB market. In 2023, foreign investors were reported to hold a 73% share of the trading volume for 10-year JGB futures. Given the constraints of Yield Curve Control, the BoJ had a particular sensitivity over Cheapest-to-Deliver issues in the futures and has chosen to manage actively the available bonds available for delivery. There is little direct data on cash/futures basis trading, though the massive size and relatively controlled (to date) nature of the market signals a background for opportunities in the trade.
China: The cash/futures bond basis trade is growing in importance as market yields decline. An important driver of China’s basis trade is the retail demand for government bonds during economic uncertainty has pushed cash bond prices higher than futures, opening the opportunity for basis trading in a counter direction (bonds rich, futures cheap) to that available in the United States (bonds cheap, futures rich).
South Korea: Basis trading is well-established and widely used by domestic institutions. The market is stable and liquid, with no recent concerns about systemic risk.
Unlike futures markets in other jurisdictions, Australia’s Treasury bond futures are cash-settled. This means the basis opportunity created by the Cheapest-to-Deliver is not available. Instead, Exchange-for-physical (EFP) is the local mechanism that links value of futures and physical bonds. At times EFPs (bond and swap) accounted for 32% of futures volume traded, with particularly heavy trading between 2021 and 2023. During this period purchase of government bonds by the RBA led to pronounced overvaluation of cash bonds relative to futures, leading to a negative basis opportunity which was extensively used by hedge funds.
Summary table of main estimated cash/futures basis exposures:
One of the difficulties with the estimates above is knowing how the average daily turnover figures are calculated. For instance, the FinanzAgentur (Germany’s debt agency) estimated daily average turnover of Federal securities as EUR27 billion in 2024. The UK DMO reports weekly average turnover by GEMMS of £45 billion. Given the international importance of Bunds and the capacity for arbitrage within the single currency area this discrepancy looks suspicious.
Furthermore, there are other reasons for caution. Outside the United States the willingness and ability to provide granular detail on cash/derivative positions is limited, and generally grudging – European Trade Repositories give out ridiculously sparse data. However, I believe I have built in conservative parameters and are willing to stand by our estimates until corrected – and I’d love to be corrected.
Which means that while ECB is technically correct to say the ‘build-up of hedge fund exposure has also been observed in the euro area government bond market, but the size of basis trade activity seems contained,’ but that may obscure the relative size of the basis trade in local markets. The cash/futures basis trade may larger in non-US markets than in the US when compared to estimates of daily average turnover (a proxy for liquidity). Again, this has to be treated with caution.
In a follow-up piece I’ll look at why the cash/futures basis should NOT the main focus. Instead, it is a unavoidable side-effect of the wholesale re-ordering of government bond intermediation following the GFC. For regulators to concentrate on the risks inherent in cash/futures basis to financial stability completely misses the reason it exists, which is largely down to regulators and fiscal expansion.