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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.
How big is the basis trade? It is currently around $800 billion and an important part of the $2 trillion outstanding in prime brokerage balances. It will continue to expand as US government debt levels continue to grow, see charts below.
Why is this a problem? Because the cash-futures basis trade is a potential source of instability. In case of an exogenous shock, the highly leveraged long positions in cash Treasury securities by hedge funds are at risk of being rapidly unwound. Such an unwind would have to be absorbed, in the short run, by a broker-dealer that itself is capital-constrained. This could lead to a significant disruption in market functions of broker-dealer firms, such as providing liquidity to the secondary market for Treasuries and intermediating the market for repo borrowing and lending. For example, during Covid, the Fed was at the peak buying $100 billion in Treasuries every day.
In addition, if the supply of Treasuries grows further, for example, because of a growing budget deficit or the Fed doing quantitative tightening, it will potentially depress Treasury prices, hurting the long leg of the trade, and stress repo funding, as dealers have limited balance sheet capacity.
The bottom line is that the large and growing cash-futures basis trade, driven by leveraged hedge fund positions in Treasuries, poses a risk due to potential market disruptions and liquidity issues, especially in the event of an exogenous shock or increasing Treasury supply.
Sources: Commodity Futures Trading Comm, Bloomberg, Apollo Chief Economist 
Note: The data are aggregated responses to SEC Form PF question 43. Only responses from Qualifying Hedge Funds are included. Sources: Data for the US Office of Financial Research, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Roughly 50% of earnings in the Magnificent 7 come from abroad, see chart below. That is higher than for the S&P 500, where the share is 41%.
With trade making up a bigger share of GDP in the rest of the world than in the US, the trade war will have a disproportionately more negative impact on the rest of the world.
As a result, the Magnificent 7 will be hit harder on their global earnings than other S&P 500 companies. Their earnings could be even more negatively impacted if Europe retaliates in the form of a digital services tax.
Sources: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Our daily and weekly indicators for the US economy are available here, and the conclusion is that the hard data is still doing okay, but there are signs of weakness emerging.
Specifically:
– Las Vegas visitor volumes and total room nights occupied have started to decline, see the first two charts.
– Weekly bankruptcy filings are moving higher, see the third chart.
– Weekly data for movie theatre visits is weak, see the fourth chart.
– Daily data for job postings has been weaker in recent weeks, see the fifth chart.
– Daily TSA travel data is slightly weaker than at this time last year, see the sixth chart.
– Continuing claims are moving higher, see the seventh chart.
Sources: Bloomberg, Macrobond, Apollo Chief Economist 
Sources: Bloomberg, Macrobond, Apollo Chief Economist 
Note: Filings are for companies with more than $50mn in liabilities. For week ending on April 4, 2025. Sources: Bloomberg, Apollo Chief Economist 
Sources: Boxofficemojo.com, Apollo Chief Economist 
Sources: Indeed, Bloomberg, Macrobond, Apollo Chief Economist 
Sources: US Department of Homeland Security, Macrobond, Apollo Chief Economist 
Sources: US Department of Labor, Macrobond, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The chart book we used during our conference call yesterday is available here.
Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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The table below shows our estimates of the impact on US GDP and inflation of tariffs and the decline in consumer sentiment and corporate sentiment.
Whether we will have a recession or not depends on the duration of this shock. If these levels of tariffs stay in place for several months and other countries retaliate, it will cause a recession in the US and the rest of the world.
We will be discussing the outlook for the economy and markets on a conference call today at 9 am EDT, you can register here.
Note: Includes Chinese tariffs from February and March, Canada and Mexico non-USMCA compliant goods tariffs from March, Steel, Aluminum and Auto imports and reciprocal tariffs on all countries announced in April. Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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When policy uncertainty went up, capital markets activity started slowing down, with a decline in loan issuance, IPO activity, and M&A activity, see charts below.
Note: Reflects repricings and extensions done via an amendment process only. Sources: PitchBook LCD, Apollo Chief Economist 
Note: Data shows completed IPO transactions. Sources: S&P Capital IQ, Apollo Chief Economist 
Note: Data shows completed M&A transactions. Sources: S&P Capital IQ, Apollo Chief Economist 
Sources: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Surveys of CEOs and CFOs show that corporate confidence has declined in recent months, see charts below.
Sources: Chief Executive Magazine, Bloomberg, Macrobond, Apollo Chief Economist 
Sources: Duke University & FRB Richmond & FRB Atlanta, Macrobond, Apollo Chief Economist See important disclaimers at the bottom of the page.
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If uncertainty stays elevated for an extended period, it will have a more negative impact on the economy, see chart below, which shows the impulse responses of a temporary and a permanent shock to economic policy uncertainty in a vector autoregression model with GDP and economic policy uncertainty.
Note: Impulse response from the VAR model with variables log (Real GDP) and log (Economic Policy uncertainty index). A one standard deviation shock to economic policy uncertainty leads to a -0.2% point decline in Real GDP. Temporary shock is defined as a four standard deviation shock in Q1, and permanent shock is defined as a four standard deviation shock in Q1, three standard deviation shock in Q2, two standard deviation shock in Q3, and one standard deviation shock in Q4. Sources: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Household sector leverage and banking sector leverage have declined significantly since 2008, see chart below. Over the same period, federal government leverage has increased significantly, and corporate leverage has moved sideways.
The bottom line is that the private sector in the US is in incredibly good shape.
Sources: Federal Reserve Board, NBER, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The IMF is forecasting that next year, income per capita will be higher in Poland than in Japan, see chart below.
Note: PPP = Purchasing Power Parity. Sources: IMF, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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