MNI BRIEF: Fed's Logan Warns Of Basis Trade Vulnerabilities

The Treasury cash-futures basis trade can de-lever very rapidly during stress periods in money markets and large margin-call changes, Federal Reserve Bank of Dallas President Lorie Logan warned Tuesday, noting "phenomenal" growth in basis trades over the past year and the highly levered hedge funds that participate.  

“Anytime you see growth like that, as a policymaker, I take note," she said at a financial market conference in Austin, Texas. "If there's stress and there's real margin call change, it has the potential to de-lever pretty rapidly. And we saw that in March of 2020." 

Growth in basis trades isn't entirely surprising given growth in U.S. debt and the desire of asset managers to have off‑balance‑sheet duration risk, Logan said. 

“One thing I worry about is, as the growth has has increased, and as the term premiums, risk premiums, have compressed, that the trade is broadened, and who participates in it. And I want to make sure that those who are in the trade have really strong risk management." (See: MNI INTERVIEW: Fed Assets Hard To Shrink Due To Deficit-Hoenig)