Federal Reserve Bank of Dallas President Lorie Logan warned market participants on Tuesday about the growing prominence of the Treasury basis trade and the risks it poses if market conditions deteriorate.
Delivering remarks at a Futures Industry Association conference in Austin, Texas, Logan described the expansion of the trade over the past year as "phenomenal." The Treasury basis trade is an arbitrage strategy in which hedge funds take highly leveraged positions to exploit small price discrepancies between cash Treasury bonds and futures contracts.
Logan cautioned that the structure of the trade makes it vulnerable in a stress scenario. "It does have vulnerabilities if there is a stress event," she said, warning that rapid deleveraging could follow. She stressed that those participating in such trades require "really strong risk management" and that there must be greater transparency around the activity.
Alongside those market-specific comments, Logan underscored the need for official-sector work on Treasury market resilience. She called completion of those reforms "critically important," indicating that policy and regulatory measures remain a priority in addressing systemic weak points linked to the growth of leveraged arbitrage.
Her remarks also touched on technology-driven demand and monetary policy. On artificial intelligence, Logan observed that power demand from AI data centers is substantial but "not as big as might think." She added a caveat about timing for productivity gains from AI, noting that if those gains arrive later rather than sooner the economy could face more overheating.
On the subject of monetary decision-making, Logan reiterated the Federal Reserve’s independence. She said "short-term politics" are not part of the Fed’s data set when setting interest rates and expressed the hope that the central bank’s independence would remain "foundational" for years to come.
The remarks combined warnings about a specific market strategy with broader concerns about resilience, transparency and the timing of technology-driven productivity benefits — themes that intersect with Treasury markets, hedge funds and broader macroeconomic stability.