Hedge funds have sharply increased their use of leveraged US interest-rate swap trades as the traditional cash-futures basis trade loses momentum, the Bank for International Settlements has warned, according to a report by Bloomberg.

The report cites a BIS paper released Monday as highlighting that the value of the so-called swap trade – funded via repo to buy Treasuries while shorting corresponding interest-rate swaps – surged to $631bn in Q2 2025, more than doubling from early 2024. The strategy has become the main driver of hedge-fund repo leverage in the US market.

The BIS cautioned that this buildup risks a repeat of April’s market turmoil, when tariff-driven rate shocks caused a rapid unwinding of interest-rate swap positions. That episode triggered violent dislocations between swap rates and Treasury yields and contributed to an 11% contraction in the size of the trade between March and June.

Regulators recently eased a key US bank-capital rule, freeing balance-sheet capacity for banks to hold more Treasuries – a shift hedge funds expect to support the trade. But the BIS said the strategy remains highly vulnerable to abrupt interest-rate spikes and selloffs, such as those seen when 10-year yields recorded their biggest weekly jump in two decades.

The trend is spreading beyond the US, with leveraged swap trades growing in Europe and Japan. Global watchdogs including the Bank of England and the Financial Stability Board are considering restrictions on repo-market leverage, citing concerns over cross-border spillovers comparable to — or potentially greater than — those posed by the cash-futures basis trade.