A widely held hedge fund bet in US rates markets – long Treasuries versus interest-rate swaps – is rapidly unwinding, as escalating tariff tensions under President Donald Trump fuel a liquidity squeeze among US banks and reshape market positioning, according to a report by Bloomberg.
The so-called Treasury-versus-swap spread trade, which hinges on government bonds outperforming swap contracts, has collapsed in recent days. Traders attribute the move to banks offloading Treasuries to raise cash amid growing economic uncertainty and reallocating into interest rate swaps to maintain market exposure without the capital burden of holding bonds outright.
Swap spreads – the difference between Treasury yields and swap rates – have compressed significantly, with the 30-year spread reaching a record low this week. For hedge funds, this marks a sharp reversal in a trade that gained traction earlier this year on expectations of bank regulatory easing.
“The most violent move in the last six weeks has been that swap-spread trade coming to a violent conclusion,” said Ed Al-Hussainy, rates strategist at Columbia Threadneedle. “Banks are now focused on preserving cash.”
The trade initially surged in February, driven by speculation that regulatory relief could expand banks’ capacity to hold Treasuries. Hopes were further buoyed by the nomination of Fed Governor Michelle Bowman for the Fed’s top regulatory role — a move interpreted by traders as signalling looser capital requirements. That prospect encouraged hedge funds to bet on wider swap spreads.
But momentum began fading in March as those regulatory tailwinds stalled. Now, the intensifying trade war with China – and the broader uncertainty surrounding US fiscal and economic policy – has pushed banks into defensive mode.
“Up until about a month ago swap spreads were trading on the news that there’s going to be bank capital reforms,” said Al-Hussainy. “Now that narrative has shifted toward cash preservation and rising Treasury supply.”
The unwind of the trade is also reflected in broader rates market positioning. According to CFTC data up to 1 April, hedge funds extended net shorts in intermediate Treasury futures by approximately 375,000 10-year equivalents – just as asset managers added long exposure worth over 438,000 equivalents.
In JPMorgan’s Treasury client survey for the week ended 7 April, long positions rose to the highest since early March, suggesting some investors are buying the dip in US sovereign debt.
