The hedge fund basis trade has become the single largest source of borrowing demand in the US repo market, a system whose true scale was itself underestimated until recently. The consensus reads this as a story about financial innovation and liquidity provision. The data, drawn from a new Liberty Street Economics report by the Federal Reserve Bank of New York, makes a less comfortable argument.
How Big Is the Repo Market, Really?
The headline number of $13.5 trillion in outstanding daily repo agreements is already striking. What receives less attention is that even this figure is a moving target. The Office of Financial Research (OFR) placed daily exposures in Q3 2025 at approximately $12.6 trillion, a number described as about $700 billion larger than previous estimates. The revision matters: if the official size of the market was materially undercounted, the concentration risks within it may have been undercounted too.
In H2 2025, total daily outstanding positions across all lenders and borrowers in the US repo market averaged $12.5 trillion, according to the OFR’s participant brief. Roughly 70% of repos are secured by Treasury securities, with the remainder backed by agency securities, mortgage-backed securities issued by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and high-grade corporate bonds and asset-backed securities. The riskier the collateral, the larger the haircut applied.
Hedge Fund Basis Trade: From Niche to Systemic
The growth trajectory of hedge fund borrowing in the repo market is the thread the aggregate totals tend to obscure. Hedge fund borrowing tripled between 2013 and 2023, from around $400 billion to $1.5 trillion, according to the New York Fed. Then it doubled again in just the following two years, reaching $3.0 trillion by late 2025. For context, that is a more than sevenfold increase from the $400 billion starting point a little over a decade ago.
The mechanism is well-known. The hedge fund basis trade involves purchasing Treasury securities and simultaneously selling Treasury futures contracts, capturing the spread between the two. The spread is thin, so leverage is the entire game. Hedge funds borrow cash in the repo market, posting the Treasury securities as collateral, and repeat. The leverage is multi-layered and, as the New York Fed notes, opaque.
Proponents of the trade point to the liquidity it provides to the Treasury market: hedge funds are large buyers of Treasury securities, and their activity helps keep cash and futures prices aligned. The Fed itself has cited this function. The problem is that when the trade encounters stress, the liquidity provision can reverse violently. In March 2020, unwinding by hedge funds contributed directly to the Treasury market locking up, a dislocation so severe that the Fed cited it as partial justification for its own large-scale Treasury purchases. The basis trade’s September 2019 repo-market blowout is also on that record.
The net borrowing figure tells the story most clearly. Hedge funds borrowed $3.0 trillion from the repo market as of July 2025, while simultaneously lending $1.3 trillion back to it. The latter activity covers short-term cash management and collateral transformation through dealers. Net borrowing therefore ran to approximately $1.7 trillion. No other single category of market participant comes close to that net figure.
Money Market Funds and What the Lending Side Reveals
On the lending side, money market funds (MMFs) are the dominant supplier of cash. MMFs lent $3.0 trillion to the repo market as of January 2026, having roughly tripled from their July 2020 level, with a peak of $3.3 trillion reached in April 2023. Total MMF balances rose by nearly $1 trillion over the past twelve months to $8.4 trillion, including a record $5.1 trillion held by households, and a substantial portion of that was channelled into the repo market. Overnight repos allow MMFs to keep cash invested while maintaining the next-day liquidity their investors require. They do not lend to hedge funds directly; dealers intermediate the relationship.
The next largest lenders are US banks at $689 billion, US branches of foreign banking organisations at $419 billion, and the GSEs at $249 billion, as of the most recent data points. These are not trivial sums, but they are secondary to the MMF position.
The Infrastructure Holding This Together
The repo market’s interconnectedness is both its strength and its fault line. Liquidity pressures in one segment can transmit across the system rapidly, visible in repo rate spikes such as those tracked by the Secured Overnight Financing Rate (SOFR). To limit contagion before it spreads, the Fed established its Standing Repo Facility (SRF) in July 2021. Approved banks can borrow from the Fed at the SRF rate to lend on into the repo market, compressing rates in the process. The facility was called upon during repo market stress between September and December 2025, when dislocations might otherwise have amplified into broader financial system instability.
Whether a $3-trillion borrowing concentration in a single trade, one that has failed publicly at least twice in recent years, constitutes a managed risk or an accumulating one is the question the participant data raises squarely. The SRF was tested in late 2025. The basis trade has not yet been tested under conditions where MMF redemptions and hedge fund deleveraging hit simultaneously.
