Defending the basis

US treasury

The Treasury cash futures basis trade has been highlighted rightly for being at the centre of two recent market hiccups. But what is less obvious is its role in supporting the Treasury market during a period of fragility. In this column, I will briefly describe the trade, how it has supported Treasury markets, and why discouraging the trade would create bigger problems for policy-makers.

At a high level, the cash futures basis trade is arbitraging the difference between Treasury futures and

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