Frantic trading in US Treasuries on Thursday morning indicated that hedge funds were rapidly unwinding positions vulnerable to losses, amplifying volatility in both cash and futures markets, according to a report by Bloomberg.
The 2- to 10-year yield spread fell nearly 8 basis points in just four minutes, hitting its lowest level in almost a year. The report cites Brij Khurana, portfolio manager at Wellington Management as highlighting that steepener trades, popular among hedge funds, accounted for much of this sudden flattening.
Swap spreads—leveraged trades betting that Treasuries will outperform similar-maturity interest-rate swaps—also faced pressure. Widener positions, once crowded and widely held, have been unwinding since Tuesday, tightening spreads by nearly 25 basis points early Thursday. Khurana noted this reflects broader positioning adjustments even amid inflation concerns and Treasury supply worries.
Fed funds futures experienced record volumes as markets rapidly repriced the likelihood of Federal Reserve rate changes. The May contract traded at levels implying a roughly 25% probability of an emergency quarter-point rate cut before the Fed’s 29 April meeting. Analysts say these flush-outs may pave the way for a more stable trading environment once hedges are cleared.
