Here’s how an obscure bet on bonds almost crashed the $29 trillion Treasury market, Fed official says
From Yahoo Finance: 2025-05-09 16:07:00
In April, a massive bond bet unraveled, causing the biggest spike in long-dated Treasury yields since 1987. The trade, known as the swap-spread trade, exacerbated the turmoil after Trump announced new tariffs. Investors had hoped for deregulation windfall, but the trade backfired, leading to chaos in the Treasury market.
The Federal Reserve’s Roberto Perli pointed to reports of leveraged investors caught off guard by sudden Treasury market moves. Investors had piled into the swap-spread trade in early 2025 in anticipation of Trump’s promised deregulation. However, the bet failed in April, adding to market chaos despite no evidence of unwinding the Treasury market “basis trade.”
Trump paused tariffs and referred to a “yippy” bond market, easing tensions. The Fed will open a key liquidity tool, the standing repo facility, for morning use due to significant deterioration in Treasury market liquidity. Perli noted the real impact of liquidity issues and the need for additional support.