Infamous Hedge-Fund Trade Draws Fresh Scrutiny During Debt Saga

A highly leveraged bond trade that’s become popular with hedge funds is drawing fresh scrutiny three years after it blew up spectacularly.

Officials at the Securities and Exchange Commission and the Federal Reserve have questioned prime brokers about leveraged trading in government bonds by their fast-money clients, according to people familiar with the matter, who asked not to be named citing the confidential nature of discussions. The dangers have been heightened as political brinkmanship around the debt ceiling has threatened to sink the US into default and unleash chaos in financial markets.

Several of the hedge funds that have recently ...