Thriving Hedge Fund Trade Gets Boost From Soaring Swap Spreads. 

Detected Manipulations & Suggested Changes

Selective use of sources

Relying mainly on sources that support one side of an issue, without proportionate representation of opposing or more cautious views.

The article quotes and paraphrases multiple institutions and strategists who are explicitly in favor of the swap spread widener trade: - "Several recent policies are adding fuel to the swap spread widener trade, according to Wall Street strategists who have come out in favor of the strategy." - "Trump’s efforts to reduce the cost of home ownership... will support 'hedging flows via paying in swaps from GSEs,' according to strategists at Barclays PLC." - "Barclays hold a long position in the 5-year sector... while Morgan Stanley are in 2-year swap spread longs citing the current benign conditions in funding markets..." - "Meanwhile, strategists at TD Securities this week said swap spreads should widen this year, as funding conditions ease, Treasury demand remains robust, and bank deregulation unlocks dealer balance sheet capacity." The article does mention risks (e.g., the April blow-up, potential policy shocks, changing Treasury supply, corporate issuance), but it does not quote any named sources who are explicitly skeptical of or opposed to the trade, nor does it present detailed counterarguments from risk-averse participants or regulators. This creates a tilt toward the pro-trade perspective.

3 suggestions

Include quotes or analysis from market participants or analysts who are skeptical of the swap spread widener trade, for example those concerned about leverage, systemic risk, or regulatory pushback.

Add commentary from regulators, central bank officials, or risk managers (if available) who may view the growth of this trade as potentially destabilizing, to balance the bullish strategist views.

Quantify and elaborate on the downside scenarios (e.g., size of losses in April, margin call dynamics, historical episodes) with the same level of detail as the upside drivers, to provide a more balanced risk-reward picture.

Appeal to authority

Using statements from experts or institutions as primary justification for a claim, without providing sufficient independent evidence or explanation.

The article leans on named institutions and officials to support key claims about the trade’s prospects: - "Spreads popped wider recently in response to comments by Federal Reserve Governor Stephen Miran who said that 'sweeping deregulation' will support further monetary easing." - "Trump’s efforts to reduce the cost of home ownership... will support 'hedging flows via paying in swaps from GSEs,' according to strategists at Barclays PLC." - "Barclays hold a long position... while Morgan Stanley are in 2-year swap spread longs citing the current benign conditions in funding markets..." - "Meanwhile, strategists at TD Securities this week said swap spreads should widen this year, as funding conditions ease, Treasury demand remains robust, and bank deregulation unlocks dealer balance sheet capacity." These authorities are relevant and appropriately identified, but the article often presents their views as sufficient explanation, without unpacking the mechanisms or providing independent corroborating data (e.g., specific deregulation measures, quantitative impact estimates).

3 suggestions

When citing Stephen Miran’s comment about 'sweeping deregulation,' briefly describe which specific regulatory changes are in question and how they mechanically affect bank balance sheets and swap spreads.

When quoting Barclays, Morgan Stanley, and TD Securities, supplement their views with independent data or academic/industry research that either supports or challenges their expectations for swap spreads.

Clarify that these are forecasts or opinions, not certainties, by explicitly labeling them as such (e.g., 'Barclays expects...', 'TD Securities forecasts...') and noting the historical track record or uncertainty around such predictions.

Conflating correlation with causation

Presenting or implying a causal relationship between events that may only be correlated, without sufficient evidence or explanation.

Several passages imply direct causality where the relationship may be more complex or only partially supported: 1) "The swap spread trade has gained in popularity in recent months in large part due to expectations that Trump’s deregulatory agenda will free up cash on banks’ balance sheet, which in turn will favor Treasuries." - This suggests that expectations about Trump’s deregulatory agenda are a primary cause of the trade’s popularity. While plausible, the article does not provide data isolating this factor from others (e.g., global rate environment, risk appetite, relative value opportunities). 2) "Spreads popped wider recently in response to comments by Federal Reserve Governor Stephen Miran who said that 'sweeping deregulation' will support further monetary easing." - Market moves may have been influenced by these comments, but attributing the widening primarily or solely to them risks overstating causality without showing intraday data, alternative explanations, or broader context. 3) "Recent steps by the Federal Reserve to calm conditions in the repo market with purchases of Treasury bills are favoring the long-cash side of the trade." - This is a reasonable causal claim, but it is stated as fact without showing evidence (e.g., changes in repo rates, balance sheet data, or specific flows into the trade) that directly link the Fed’s actions to the performance of this particular strategy.

3 suggestions

Qualify causal language with terms like 'appear to,' 'are seen by traders as,' or 'are believed by some analysts to' when direct causality is not firmly established by data.

Provide supporting evidence for causal claims, such as time-series charts, flow data, or references to research that link deregulation expectations, Fed comments, or repo operations to swap spread behavior.

Acknowledge alternative or additional drivers (e.g., global risk sentiment, supply-demand dynamics, hedging needs) alongside policy expectations, to avoid implying a single dominant cause.

Unsubstantiated claims

Statements presented as fact or as dominant explanations without sufficient evidence or sourcing in the text.

Some explanatory statements are asserted without detailed support: - "The swap spread trade has gained in popularity in recent months in large part due to expectations that Trump’s deregulatory agenda will free up cash on banks’ balance sheet, which in turn will favor Treasuries." The article does not provide survey data, positioning data broken down by motive, or explicit trader commentary that directly ties the popularity increase to this specific expectation. - "Several recent policies are adding fuel to the swap spread widener trade, according to Wall Street strategists who have come out in favor of the strategy." While this is attributed to strategists, the specific policies and their quantified impact are not fully detailed, leaving the reader with a broad, somewhat vague causal assertion. - "Trading in many of these contracts is anonymous, making it difficult to identify the firms involved and the exact beneficiaries of the bets." This is likely true for many OTC derivatives, but the article does not reference any specific market structure explanation or data; it is presented as a general fact without sourcing.

3 suggestions

For the claim about Trump’s deregulatory agenda driving popularity, either cite specific research, surveys, or positioning analyses that support this, or rephrase to indicate it as a commonly cited view among certain strategists rather than a proven primary cause.

List or briefly describe the 'several recent policies' (e.g., specific deregulatory rules, housing-related directives, repo operations) and, where possible, reference official documents or data that show their impact on bank balance sheets or hedging flows.

For the statement about anonymous trading, add a short explanation of the relevant market structure (e.g., OTC swap trading conventions, SEF usage) or cite a regulatory or industry source that describes the anonymity and its implications.

Oversimplification

Reducing complex economic or policy relationships to simple, linear explanations that may omit important nuances.

The article compresses several complex mechanisms into brief causal chains: - "The swap spread trade has gained in popularity... due to expectations that Trump’s deregulatory agenda will free up cash on banks’ balance sheet, which in turn will favor Treasuries." This compresses multiple steps: specific deregulation measures → changes in capital/liquidity requirements → bank balance sheet usage → demand for Treasuries → swap spreads. Each step involves uncertainties and constraints that are not acknowledged. - "Trump’s efforts to reduce the cost of home ownership, including ordering Fannie Mae and Freddie Mac to buy $200 billion worth of mortgage-backed securities will support 'hedging flows via paying in swaps from GSEs,' according to strategists at Barclays PLC." The link from policy directive → MBS purchases → hedging flows → swap spreads is plausible but complex; the article does not explain the hedging mechanics (e.g., duration hedging, convexity hedging) that connect these steps. - "Recent steps by the Federal Reserve to calm conditions in the repo market with purchases of Treasury bills are favoring the long-cash side of the trade." This condenses a complex interaction between repo rates, collateral demand, dealer balance sheets, and relative value trades into a single sentence.

3 suggestions

Briefly outline the key steps in the causal chain from deregulation to swap spreads, and acknowledge that multiple factors (capital rules, risk appetite, global demand for safe assets) interact in determining banks’ Treasury holdings and swap positions.

Add one or two sentences explaining how GSE MBS purchases typically lead to hedging flows in swaps (e.g., 'GSEs often hedge the interest-rate risk of their MBS portfolios by paying fixed in interest-rate swaps, which can affect swap spreads').

Clarify that Fed repo interventions influence funding conditions and collateral dynamics, which in turn can make holding cash Treasuries more attractive relative to swaps, rather than implying a direct, one-step effect.