Trump’s 90-day pause on reciprocal tariffs appeared aimed at easing trade tensions—but in reality, it offered immediate relief to a financial system buckling under stress. Just days before the announcement, Treasury markets experienced a violent selloff: 10-year yields surged nearly 50bps in 48 hours, the sharpest move since 2001. The cause? A rapid, disorderly unwind of “basis trades”—a popular hedge fund strategy involving leveraged long positions in Treasuries offset by short interest rate swaps. When prices turned, these trades began to implode. With leverage levels reported around 20:1, even a modest 5% move wiped out entire positions, forcing mass liquidations.

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Liquidity vanished. Swap spreads—differences between Treasury yields and swap rates—collapsed, signaling severe stress in the financial plumbing. Most alarming was the 3-year SOFR swap spread flipping deeply negative. Normally, positive spreads reflect healthy market functioning. A plunge into negative territory suggests that investors were dumping Treasuries en masse, even preferring synthetic exposure through swaps—a red flag that the U.S. government bond market was freezing. By pausing the tariffs, Trump offered breathing room to both the bond market and the institutions exposed to it. What looked like diplomacy was, in practice, a market intervention orchestrated by Treasury Secretary and former Hedge Fund Manager Scott Bessent.

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