The backdrop to Trump’s tariff delay wasn’t just macroeconomic—it was mechanical. The collapse in swap spreads and surging yields exposed a hidden fragility: the extreme leverage hedge funds have embedded in the Treasury market. These “basis trades” have been building since 2020, quietly becoming one of Wall Street’s most crowded trades. Hedge funds borrowed cheaply and massively to buy Treasuries while shorting swaps, expecting spreads to narrow. But when volatility returned and swap spreads widened the wrong way, the whole structure began to implode.

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Dealers faced liquidity black holes. Repo markets wobbled. Even the Fed was reportedly preparing emergency tools, but political optics complicated intervention. Trump’s tariff pause wasn’t about rethinking protectionism—it was about preventing a Treasury auction disaster and buying time for the Fed to quietly prepare backstops. In the end, it was a decision to prioritize financial system stability over trade war theatrics.

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