Something very unusual happened in financial markets yesterday. Long-term interest rates went up 20 basis points despite stocks going down. One potential reason for the move higher in rates is an unwind of the basis trade. The basis is the difference in price between a Treasury security and a Treasury futures contract with similar characteristics. The source of this price difference is demand and supply imbalances in Treasury markets, or arbitrage limitations for regulatory reasons. In the basis trade, hedge funds put on leveraged bets, sometimes up to 100 times, with the goal of profiting from the convergence between the futures price and the bond price, as the futures contract approaches expiry. […]