Popular Swaps Trade Faces Moment of Truth on Fed Portfolio Plans

One of this year’s most popular macro strategies, the swap spread trade widener, faces an inflection point in the Federal Reserve’s widely expected update to its $6.6 trillion securities portfolio at Wednesday’s meeting.

The trade uses derivatives to wager the gap between rates on interest-rate swaps and yields on equivalent-maturity Treasuries will grow. On Tuesday, 30-year swap spreads peaked at their widest levels in eight months. Its future performance, though, depends in part on whether the Fed stops shrinking its balance sheet sooner than previously expected — a step the central bank could announce at its upcoming meeting.

In theory, ...