Hedge funds' most popular trade in the US bond market is showing signs of maxing out, according to Bloomberg Markets. The crowded positioning that fueled strong returns earlier in the year has begun to sputter as liquidity tightens and volatility rises.

Market participants note that the trade — largely centered on basis trading and relative value strategies across Treasury futures and cash bonds — has become increasingly one-sided. With leveraged funds holding record-long positions in 2-year and 10-year Treasury futures, the risk of a disorderly unwind has grown.

Dealers report widening bid-ask spreads and reduced depth in key futures contracts, making it harder to adjust positions without moving prices. Some funds have already started trimming exposure, but the sheer size of the remaining positions suggests further deleveraging could pressure yields.