The abrupt unwinding of a popular 'Trump trade' in the Treasury market likely fueled April tumult, says Fed's securities-portfolio manager.

A massive bond bet backfired in April - and a top Federal Reserve official now says it likely sparked the biggest spike in long-dated Treasury yields since 1987.

Roberto Perli, who manages the Fed's roughly $6 trillion securities portfolio, said Friday that the abrupt unwinding of a popular trade known as the swap-spread trade likely exacerbated April's liquidity crunch in Treasurys.

The turmoil began after President Donald Trump announced sweeping new tariffs on April 2. At first, investors rushed into U.S. government debt in a "classic flight-to-safety" trade. But just days later, yields on long-dated Treasurys reversed sharply; the 30-year yield BX:TMUBMUSD30Y rose nearly 50 basis points in a week, its biggest such jump since 1987.

"One factor that appears to have contributed to this unusual pattern is the unwinding of the so-called swap-spread trade," said Perli, manager of the New York Fed's System Open Market Account, in a speech on Friday.

Perli also pointed to reports of leveraged investors being caught off guard by sudden moves in the Treasury market.

Investors piled into the swap-spread trade in early 2025 in hopes of a windfall should Trump usher in promised deregulation, especially for the banking sector.

That trade backfired in April, exacerbating chaos in the nearly $29 trillion Treasury market, as MarketWatch explained last month - despite widespread reporting at the time that the classic Treasury market "basis trade" was part of the problem. In his remarks on Friday at a Fed conference in Washington, Perli said there was "no evidence" of an unwinding of that basis trade.

Read: How the 'trade of the year' in the bond market became a nightmare for investors after Trump's tariffs

Instead, Perli pointed to reports that "many leveraged investors were positioned to benefit from a decrease in Treasury yields of longer maturity relative to equivalent-maturity interest-rate swaps, partially due to the expectation for an easing of banking regulation that would bolster bank demand for Treasurys."

He further explained that investors "were making a directional bet that swap spreads would increase" - but, as MarketWatch reported, that didn't play out.

Trump pointed to a "yippy" bond market when he abruptly paused his April 2 tariffs for 90 days for most U.S. trade partners, with the exception of China.

On Friday, Perli also said the Fed will soon open up a key liquidity tool, known as the standing repo facility, for morning use, in addition to its existing afternoon operations.

"The deterioration in Treasury market liquidity was real and significant," he noted.