Morgan Stanley said that the hedge fund-favored U.S. Treasury strategy is contracting, reflecting scarce profit opportunities.

An analysis by Morgan Stanley shows that a popular US Treasury trading strategy that hedge funds have come under scrutiny by regulatory authorities is contracting. Led by strategist Eli P. Carter, the size of the basis trade the difference between cash and futures prices of US Treasuries has decreased from a record high of $1.5 trillion earlier this year to $1.35 trillion. This trade aims to profit from the small price differences between US Treasuries and their corresponding futures contracts. The decrease in size reflects a scarcity of price discrepancies in the US Treasury market that can create profit opportunities, thereby dampening relative value strategies. While these trades help provide liquidity to the market, they may threaten financial stability during times of market pressure if hedge funds need to rapidly liquidate their positions.