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The Wall Street Skinny
April 17, 2025
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Were hedge fund blowups REALLY behind the big move in bonds last week? Breaking down the mysterious “basis trade” and testing the theories…
Coulda/woulda/shoulda? Courtroom docs reveal Zuckerberg considered spinning off Instagram from Meta. We offer a technical explanation of what might have happened…
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Basis Trade Blow-up: The REAL Culprit behind the Bond Market Chaos?
There’s been considerable speculation that last week’s bond market chaos wasn’t caused by a loss of confidence in U.S. assets due to tariff policy announcements.
Rather, some argue, massively levered hedge funds unwinding something called “the basis trade” was perhaps to blame.
Bloomberg ran several articles on this subject, and Torsten Slok (Apollo’s chief economist) published this piece. On the “All In” podcast, we heard a theory that the move came from “Japanese hedge funds” blowing up. Seems unlikely, though perhaps this was a conflation of “hedge funds blowing up” whilst “Japan sells U.S. Treasuries.”
In order to understand these theories, we need to get a little technical.
First, you need to understand that there are two basic ways that investors can get long interest rates: buying cash bonds, or using derivatives.
Buying cash bonds means physically purchasing things like U.S. Treasuries, say $100mm 10 year notes. That purchase can be done one of two ways:
1). Spending $100mm of your own money, or
2). Financing a long position in the repo market by borrowing some portion of $100mm and pledging the Treasuries as collateral for that loan.
The latter is a leveraged position, where you might put up say $10mm of your own cash and borrow the remaining $90mm to buy $100mm worth of bonds. The interest rate you pay on the financing for that loan is typically the General Collateral rate, or “GC”.
You have many options on the derivatives side, but perhaps the most liquid is buying Treasury futures. It is a contract wherein the seller promises to deliver physical US Treasury bonds to the buyer at expiry. Futures give you exposure to the corresponding part of the Treasury curve — TY futures correspond to the 10 year sector — in a highly levered way.
Unlike the heavy balance sheet associated with a cash bond purchase, only a small cash outlay of margin is required upfront. No bonds change hands until physical delivery is taken. The contract will specify an eligible basket of bonds that can be delivered for contract settlement, one of which will be mathematically “cheapest to deliver”.
All else being equal, because futures are much less balance sheet intensive and offer levered exposure, they are more desirable than their cash counterparts for buyers like long only bond funds, big asset managers, pension funds, etc. This makes futures structurally “rich” relative to the very same cash bonds that can one day be delivered into that contract.
Hedge funds look to arbitrage this price differential through something called the “basis trade”. They BUY the cheaper cash bonds, accessing leverage through the repo markets, and SELL the richer futures contracts, knowing that the two prices should converge as you approach contract expiry.
On paper, this looks like a low-risk carry trade, and only worth a handful of basis points at best. So in order to make the trade worthwhile, hedge funds lever up 20x, 50x, or perhaps even 100x through the repo markets to make the investment worthwhile.
Like all carry trades, it’s “up by the stairs, down by the elevator shaft”. If there is suddenly massive pressure on US Treasuries relative to futures — like we saw last week, due to decreased confidence in the credibility of the US government — the bonds these hedge funds own start collapsing in price. This triggers massive mark to market losses, especially for those operating with extreme leverage.
If hedge funds are forced to stop out — either by their risk controllers or investors — unwinds of this trade would sharply exacerbate a selloff in Treasuries.
And indeed, we’ve seen reports of hedge fund portfolio managers getting stopped out in the last week. However, the order of magnitude being reported here is nowhere near sufficient to explain the broader move we saw in Treasury markets. And without massive dislocations in the repo market, there’s nothing to suggest a funding crisis that might trigger Fed intervention (which is what we saw the last time the basis trade blew up, in 2020).
Instead, we think basis trade blowups may instead be a symptom, rather than the cause, of bond market chaos. The moves in the market last week seem much more indicative of a growing unease with the fundamentals of US debt and the shifting dynamics of investor attitudes towards US dollar denominated assets.
Zuckerburg Considered an Instagram Spin Off...What the Heck is a Spin Off?
There’s been renewed buzz about Big Tech breakups after a courtroom reveal: Mark Zuckerberg considered spinning off Instagram in 2018 over fears of antitrust scrutiny. The news surfaced during a high-profile trial in Washington that’s widely seen as the first real test of the Trump administration’s new posture toward regulating tech giants.
Facebook bought Instagram in 2012 for what seemed a huge price at the time: $1bn.
In hindsight it's gone down as probably one of the "best" acquisitions of all time, given Instagram is likely currently worth somewhere between $100- 250bn (using what we can glean about their revenues since Meta doesn't make that info public, and applying a similar multiple to where comps like Snapchat and Meta trade).
Documents also emerged that showed a Facebook email where Zuckerburg said "It's better to buy than compete" supporting the FTC’s “buy or bury” allegation: that Meta intentionally snapped up emerging competitors to preserve its monopoly.
While the trial has focused on Meta, the implications extend well beyond. If the government decides to act, what happens to Google (Alphabet) and its ownership of crown jewel assets like search, YouTube etc.?
So this felt like an awesome opportunity for us to discuss the range of options available to these big tech giants as the government comes after them about breaking up their business…and what it would mean for anyone who owns Meta stock (probably most of us, or at least anyone invested in the Nasdaq or S&P.)
The Two Buckets: Sell It or Separate It
When companies "break up", there are generally two ways it can go:
Sale – Sell the asset outright in what's called a "divestiture"
Public Market Separation – Use structures like spinoffs, split-offs, or carve-outs
Let’s walk through each using Meta and Instagram as a case study.
1. A Sale (Divestiture)
Meta could sell Instagram. Theoretically. But who could buy it?
Instagram generates billions in revenue (estimates from 2023 are between $39 - 60bn) and is arguably more valuable than most other public companies.
Selling it to another tech titan like Apple or Google would just create new monopoly concerns. And there are few players — strategic or financial — who could credibly afford it. So while clean in concept, a sale would likely have never been on the table. Not to mention it would mean a Meta competitor would be the buyer, likely a nonstarter for Zuckerberg.
2. Equity Carve-Out
This brings us to the set of tools called "public market separation techniques" which are basically what they sound like...ways to separate companies using the PUBLIC markets.
The first tool, and a common one companies use is an equity carve-out, sometimes called a "subsidiary IPO".
Meta could IPO a minority stake in Instagram (say 10–20%), while keeping majority control. It would raise cash, offer transparency into Instagram as a standalone business, and give Instagram its own stock which not only could help incentivize its own leadership, but also become its own form of acquisition currency to pursue acquisitions.
But here's the rub: Meta would still be in control. Since Meta knew the government was going to come after it for monopoly concerns, this wouldn't cut it.
3. Spinoff: The Clean Break (and the one in question)
The option Meta specifically mentioned entertaining is a spinoff.
Meta would distribute Instagram shares to existing shareholders. Own Meta now? You’d wake up with shares in both Meta and Instagram. The value of Meta would obviously be lower because it no longer owns Instagram, but YOU own Instagram now as a separate company! It’s a clean break, and — if structured properly — it can be tax-free to investors.
4. Split-Off: Choose Your Adventure
A split-off is like a spinoff — with a twist. Shareholders choose:
a.) Stay with Meta OR
b.) Exchange shares for stock in the newly separated Instagram.
This results in two cleanly separated investor bases and offers a clear path to disentangle business lines. It also functions like a share buyback in a way because investors that choose Instagram must surrender Meta shares in exchange for Instagram shares.
This is less common, and Zuckerberg did not mention this, but if we see other tech giants go the breakup route, it's an option.
The Bigger Picture
While most companies resist breakups, history shows that spinoffs often outperform their parent companies. Why?
Because the “synergies” companies cite to justify staying together are often overstated— while the strategy tax (aka conglomerate discount) of running two very different businesses under one roof is real.
Unleashing Instagram to operate independently might have unlocked value for both sides...maybe. Instead Meta chose to further integrate the two further.
Whether Meta, Alphabet, or Amazon — if the new administration is serious about taking on Big Tech, these are the playbooks in motion. And while boardrooms may dread the word “breakup,” the markets often don’t. More transparency, better alignment, and freedom to focus can lead to stronger execution and higher valuations.