A Vanishing Treasuries Trade Poses Threat to Largest Debt Market

A Treasuries arbitrage strategy favored by hedge funds has fallen into near-hibernation, threatening liquidity in the world’s largest debt market.

Bets that use borrowed money to profit from tiny price discrepancies between futures and the underlying cash Treasuries unraveled in a matter of weeks amid the global rush to safety in March. Known as the cash-futures basis trade and commanding almost $1 trillion at its peak, the strategy is now about half that size, and many analysts doubt it will revive: The profit potential has shrunk, and traders are still smarting from their first-quarter pain.

The fate of the trade has crucial implications for the $20 trillion Treasury market...