The Treasury basis trade, as cynics like to say, is akin to picking up pennies in front of a steamroller. Except the pennies are getting harder and harder to find.

Returns in the popular hedge fund strategy have dwindled to a few basis points, as large dealers muscle in on the trade. Many firms are now questioning its viability.

“The basis trade is basically a very boring trade right now,” says a head of fixed income sales at a broker-dealer.

Client positions have been smaller since the June