A widely followed hedge fund trade on dollar swap spreads is quickly attracting renewed attention as strategists at major US banks pile back into long recommendations, with Morgan Stanley, Barclays, and Citibank all promoting the so-called “spread widener” trade, according to a report by Bloomberg.
Since early September, the strategy, which bets that US government debt will outperform interest rate swaps has performed strongly, particularly in the 10-year sector, where dollar swap spreads have widened in 19 of the past 26 sessions, peaking at 46 basis points inverted on Wednesday—the widest since April.
Blake Gwinn, head of US rates strategy at RBC Capital Markets, noted that spreads are likely to widen further due to low volatility and a lack of new government data to shift the Federal Reserve narrative. Morgan Stanley has specifically taken a long position in two-year swap spreads, citing overly pessimistic market expectations around funding conditions through year-end. Citibank and Barclays have made similar recommendations, highlighting the improving fiscal outlook and calmness in the repo market.
However, strategists caution that widening is not guaranteed. Citi flagged potential tightening from foreign reserve manager activity, while Barclays noted convexity-related receiving flows could compress long-end spreads if US economic data deteriorates. Seasonal trends in October also suggest historical spread tightening in the 10-year sector, offering a note of caution.
The trade previously faced pressure in April following President Donald Trump’s tariff announcement, which caused spreads to collapse and wiped out positions. With renewed attention from hedge funds and institutional investors, the dollar swap spread trade is once again becoming an increasingly crowded position in the market.
