red money” has moved into swap-spread trades linked to the Secured Overnight Financing Rate (SOFR) – essentially betting on the difference between Treasury yields and interest-rate swap rates – because they can also be scaled up with relatively little capital. The Dallas Fed’s concern is that swap-spread positions can carry much more dollar risk for each dollar of “notional” exposure than basis trades, so a modest loss can hit margin and risk limits quickly and force fast de-risking. Even then, the basis trade is still bigger: Federal Reserve Board staff estimate roughly $830 billion in basis positions versus about $305 billion in swap-spread positions as of September 2025.
Why should I care?
For markets: Hedge funds’ $305 billion swap-spread book could mean choppier Treasury futures and repo.
Because many relative-value strategies are managed to margin and value at risk – a common risk gauge of potential losses – what matters is the dollars you can lose, not just the headline notional size. The Dallas Fed says swap-spread positions pack more dollar risk per unit of notional, so a routine market move can force funds to cut exposure sooner than a similar-sized basis book would. And the easiest legs to trim are often the most liquid ones: Treasury futures and repo-funded cash positions. That’s why even “modest” outflows from swap-spread trades can translate into outsized unwinds in futures and repo, with front-end SOFR-linked swap spreads and futures liquidity potentially gapping more abruptly than the shift in positioning suggests.