Basis Trades and Treasury Market Illiquidity

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The Treasury basis trade exploits the price difference between Treasury bonds and futures. The trade is exposed to financing and liquidity risks that can affect market liquidity. This brief summarizes evidence on the size and extent of basis trading by hedge funds, and on whether these trades contributed to Treasury market illiquidity in March 2020. Timely intervention by the Federal Reserve in the Treasury and repurchase agreement markets may have limited the extent of spillovers that could affect financial stability. (Brief no. 20-01)