Steven T. Williams Published September 9 2026

After years of regulatory attention and several near misses, the Treasury basis trade now hovers around $1.5tn, more than 50 per cent above its pre-Covid peak. Proposed remedies include leverage ratio relief, mandatory central clearing, minimum repo haircuts, and an expanded Standing Repo Facility. Each addresses a real friction, but none resolves the underlying cause.

The proposal from Anil Kashyap, Jeremy Stein, Jonathan Wallen and Joshua Younger is carefully argued and worth taking seriously. But it is also a statement of resignation. The premise is that the Treasury market’s architecture is now so fragile that the best answer is a better mechanism for absorbing its failures. Most expect regulators to train their tools on Treasury market intermediaries. The Brookings proposal pushes the onus on to the Federal Reserve. Meanwhile, the US Treasury — which issues every dollar of US government debt in question — appears nowhere in the proposed solutions.

The basis trade exists because pension funds, insurers and asset managers need long-dated duration against liabilities. Treasury futures close this gap efficiently. Net institutional long positions have exceeded $1tn for many years. Hedge funds sell the rich futures contract, buy the cheaper bond and finance the position through leveraged repo market borrowing. They are rational actors filling a structural void. The fault is in the design.