Most of the Treasury RV trades all have something to say about liquidity. In the past, traders often looked at the TED spread as an indicator of liquidity concerns and stress. Now, we have a wider set of liquidity indicators based on hedge fund-levered Treasury trades. A shock in these spreads is based on a change in Treasury yield expectations and will lead to a decline in liquidity that will force deleveraging or arbitrageurs to leave the market.
Treasury Basis trade—The difference between Treasury futures and the cheapest-to-deliver bond. Treasury futures trade at a premium to cash bonds, yet that premium will change with market conditions, albeit converge at delivery. Hedge funds can sell futures and buy the cheapest-to-deliver bonds to capture this premium.
Off-the-run vs. on-the-run trade - The difference between the current Treasury bond most recently issued and bonds that are slightly older since issuance. There is a liquidity premium with holding the on-the-run bond that offers investors an opportunity to profit from the differences in the price of these similar bonds.
Swap-treasury trade—The difference between fixed-pay swaps and Treasury yields, especially for longer maturities, given that the swap will often require less capital than holding the Treasury bond based on the supplemental leverage ratio. Hence, the swap spread will be negative.
SOFR RV trade - Differences in short-term yields based on the technical issues of SOFR versus other short-rate alternatives.
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