The Spike In Yields Isn't China Dumping Treasuries
Posted by freedomforall 2 weeks, 2 days ago to Economics
Excerpt:
"Understanding The Basis Trade
The basis trade is an arbitrage strategy that takes advantage of the price difference between a futures contract and the underlying asset (often a bond or another security). The goal is to profit from the "basis" — the difference between the spot price of the asset and the futures price.
In the context of U.S. Treasuries, the basis trade typically involves:
Buying a Treasury bond (long cash bond)
Selling a Treasury futures contract (short futures)
Traders expect that by the time the futures contract expires, the price of the futures and the cash bond will converge — allowing them to lock in a relatively risk-free profit, especially when they leverage the trade with cheap borrowed money.
Picking Up Pennies In Front Of A Steamroller
You can probably guess where this is heading. The basis trade is the poster child for "picking up pennies in front of a steamroller":
✅ The pennies: Small, predictable profits from the spread between cash Treasuries and futures.
🚂 The steamroller: The risk of massive losses if funding costs spike, bond prices move sharply, or market liquidity evaporates — especially when the trade is highly leveraged.
That metaphor really captures the asymmetry: small upside vs. potentially catastrophic downside. It’s one of those trades that works… until it really, really doesn’t."
"Understanding The Basis Trade
The basis trade is an arbitrage strategy that takes advantage of the price difference between a futures contract and the underlying asset (often a bond or another security). The goal is to profit from the "basis" — the difference between the spot price of the asset and the futures price.
In the context of U.S. Treasuries, the basis trade typically involves:
Buying a Treasury bond (long cash bond)
Selling a Treasury futures contract (short futures)
Traders expect that by the time the futures contract expires, the price of the futures and the cash bond will converge — allowing them to lock in a relatively risk-free profit, especially when they leverage the trade with cheap borrowed money.
Picking Up Pennies In Front Of A Steamroller
You can probably guess where this is heading. The basis trade is the poster child for "picking up pennies in front of a steamroller":
✅ The pennies: Small, predictable profits from the spread between cash Treasuries and futures.
🚂 The steamroller: The risk of massive losses if funding costs spike, bond prices move sharply, or market liquidity evaporates — especially when the trade is highly leveraged.
That metaphor really captures the asymmetry: small upside vs. potentially catastrophic downside. It’s one of those trades that works… until it really, really doesn’t."
