By Djellal Djouad
The leveraged Treasury complex is under a quiet, building squeeze, and it is worth walking the mechanics before the next catalyst rather than after. Carry has gone negative, the 10Y has pushed to 5.00 to 5.04 percent at the old cycle high, and top of book depth has thinned to roughly $1mm. Those three pressures arrive together, and together they are the blow up condition.
On a $100m book a plus 50 basis point session marks the bond leg near minus $4.1m against roughly $2,361 a day of carry, a margin call on the order of 1,700 times the reward. You cannot carry through a move like that. You get liquidated. The full piece works every structure in point value: cash-futures, repo funding, the curve, and the TIPS breakeven. It ranks the risks, with dealers long SFR plus 89 into a thin book as the amplifier, the rates equivalent of dealer gamma. And it walks the seven step cascade with the dollar P&L at each step.
The last section shows why the basis book and the dispersion book share one tail: correlation to one, liquidity to zero. Same failure, two desks.
The full analysis, with all the point-value tables and the three tripwires to watch next week, is on djellaldjouad.com:
https://djellaldjouad.com/blog/treasury-basis-trade-blow-up-risk/
Related reading
The Coiled Spring: a hawkish super-week and the long end
Djellal Djouad
Further reading