Crowded Hedge Fund Treasuries Bet Faces Risk of Rapid Unwind

A highly leveraged hedge fund strategy is flashing signs of strain amid concern that a potential shift in Federal Reserve balance-sheet policy and broader risks could fuel renewed volatility in bonds.

The trade, essentially a bet that Treasuries will outperform similar-maturity interest-rate swaps, widening the yield gap between the two, has come under pressure this week in the long end of the curve. Spreads there have narrowed to their tightest since mid-December. Some market watchers say the move bears the hallmarks of early deleveraging in crowded widener positions, which had delivered strong gains since rebounding from April’s tariff-driven selloff.