Is the big bond short just the other side of a basis trade?

Yes, probably. Or at least according to Goldman.

It’s the first session of a holiday-shortened week in the US, so I’ll spare readers a deep-dive, but suffice to say what looks like a historic Treasury short among leveraged funds is probably a basis position following a year of cash-buying.

“Households” (which many readers know is a Flow of Funds category in the Fed data that includes levered investors) were the largest buyer of Treasurys last year at over $1 trillion, Goldman’s Praveen Korapaty said, noting that the category hasn’t been this involved since the period encompassing 2018 and the first half of 2019, in the lead up to that year’s September repo chaos.

“We believe the position build up this time around is already comparable to what it was back then, and will likely get substantially bigger, especially given our expectation for significant increases in Treasury coupon supply (in addition to bill supply) starting with the August refunding meeting,” Korapaty went on.

The figure is straightforward. There’s a relationship between Treasury longs (in funds’ SEC reporting) and hedge funds shorts, and the big jump in “household” bond-buying suggests the former has picked up alongside leveraged funds’ short position. That, Korapaty said, “point[s] to the large Treasury-futures basis position that we think exists.”

I’ll leave it to others to play sleuth, conjure possibly spurious parallels or chance imparting something incongruous to the current situation (all of which are risks when you approach this from the outside looking in).

Just note that because the Treasury market is foundational, and because bond-futures basis blowups can be associated with untenable dislocations conducive to Fed intervention (and thereby headlines about “stealth” bailouts), there’s a kind of cottage industry for media coverage around the topic even in instances when it doesn’t make a lot of sense to talk about potential blowups.

Korapaty’s note was almost guaranteed to be quoted in the mainstream financial media by the end of Tuesday. I’ll look forward to any associated editorializing and/or additional quotables journalists manage to extract from unlucky souls compelled to man a desk during a holiday week.