On "Voice Trading comeback"

FT recently published an interesting article on the "voice trading comeback" in the Treasury bond market. The article claims that reason behind this comeback is the increased demand for Treasury basis trades, which are hard to execute electronically. However, it stops short of explaining why. In this post, I will try to fill that gap.

Trading of Treasury bond basis goes back to the late 70s. However, it became popular again in late 2023, driven by rising Treasury issuance and structural demand for futures in a high interest rate environment. You may have noticed a few articles about Treasury basis occasionally popping up here and there.

🟩 How to trade (long) treasury basis ?

• Borrowing cash from the bank via repo transaction
• Buying bonds in the cash market and simultaneously posting them as collateral in the repo market
• Selling bond futures.
• On the delivery date, the cash bond will be delivered into the short bond futures contract
• Invoice proceeds from the short bond futures contract will be used to "repurchase" the bond at the maturity of repo transaction.

🟥 How to trade short treasury basis ?

• Similar to the above, but instead of borrowing cash, one borrows bonds via a reverse-repo transaction and sells them in the cash market.
• For your bank to be able to lend you bonds, it needs to have them on its balance sheet first. And the balance sheet is a scarce resource.

🟧 Why it is traded by voice ?

While trading of equities, FX, or options has been largely "democratized", you cannot simply execute a Treasury basis trade via your Interactive Brokers account.

Buying and selling the basis always involves borrowing cash and borrowing bonds in a highly leveraged manner via repo and reverse-repo transactions. That means access to cheap repo funding and the balance sheet of Treasury bonds is a critical component of the trade, which differentiates winners from losers.

Being a member of the earlier group typically requires a seat in a hedge fund with an established relationship with a bank willing to grant access to its balance sheet available for repo trading. This balance sheet is a limited resource, carefully allocated to the most valuable buy-side clients. This is the reason why this type of trading is done by voice and not electronically.

📙 One of the best books on Treasury bond basis is by Galen D. Burghardt et al., with the same name. This kind of trading is not for everyone for the aforementioned reasons. However, the book certainly is.