Review of 2025: It’s the end of the world, and it feels fine

Markets proved resilient as Trump redefined US policies – but questions are piling up about 2026 and beyond

In April, Donald Trump did something he had been talking about for months. His tariff announcement stunned the markets – causing mayhem in commodities, credit, currencies and stocks – and led to an alarming surge in US Treasury yields that forced the president to put one of his signature policies on ice just one week after it had been unveiled.

Many of Trump’s other actions have been less well-trailed – he came to office promising an end to overseas military adventures, but has bombed Iran, struck Nigeria and Venezuela, and goaded Denmark. At home, he has repeatedly tried to station national guard troops in Democrat-run cities, deported immigrants indiscriminately – not just the criminals he pledged to target – defanged agencies that oversee the federal government and sought to sack a Federal Reserve governor.

But, after April’s squall, the markets – and the US economy – have shrugged much of this off. The S&P was up around 17% through late December and Treasury yields are back where they started the year, albeit after three rate cuts from the Fed. The US economy racked up 4.3% growth in the third quarter, and inflation eased to 2.7% in November according to the US Bureau of Labor Statistics, down from 3% in September. 

There are various ways to read this. Perhaps Trump’s actions will prove to be good for growth. Perhaps investors are cherry-picking the good and ignoring the bad. Or perhaps markets believe the financial system and economy have enough resilience and momentum to cope with some policy friction.

But while US stocks spiralled higher in the back half of 2025, so did a growing sense of unease and fragility. After a spate of bankruptcies in the third quarter, JP Morgan chief executive Jamie Dimon warned of ‘cockroaches’ lurking in the credit markets. Analysts repeatedly noted that much of US growth was tied to investment in artificial intelligence, which could ultimately prove a lose-lose proposition in the near-term: millions of jobs may be at risk if the technology works as advertised; trillions in debt and equity could be wiped out if it doesn’t.

Behind all of this is a less widely publicised risk. The Trump administration’s sweeping government job cuts have thinned the ranks of supervisory agencies by around 30%. US markets are operating with reduced oversight – and outdated prudential rules – at a time of huge economic, geopolitical and technological change.

And while most eyes were on the US in 2025, one consequence of the Trump administration’s new national security strategy could be that other countries – particularly in the eastern hemisphere – now matter more, setting the stage for wider realignment and potentially fresh conflict in the years to come.

Here, we look back at some of the year’s biggest Risk.net stories, and those with the greatest potential to shape the coming 12 months.

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The day after tomorrow

Arguably the biggest shock after Liberation Day was the performance of US Treasuries, which initially lived up to their reputation as a safe haven in times of crisis and then gave up the ghost. Ten-year yields began rising on Monday, April 7 and kept climbing at an alarming rate.

The popular explanation was that investors were indiscriminately unloading US assets in what was widely dubbed the ‘sell America’ trade. Risk.net’s reporting revealed there was more going on behind the scenes. Hedge funds had piled into a bet on US Treasuries outperforming swap equivalents in the months leading up to Liberation Day. The tariff announcement caused the price difference between the two instruments – known as the swap spread – to move in the opposite direction, and the forced unwind of these positions was contributing to the jump in Treasury yields.

Related

Hedge funds flock to US swap spreads on SLR easing talk 

‘Trade of the year’ sees investors position for shrinking negative basis as Treasuries predicted to outperform swaps

By the morning of April 9, the rates market was in panic mode. A poorly received three-year note auction the previous day triggered selling that threatened to overwhelm dealer capacity. If a closely watched 10-year auction on the afternoon of April 9 went badly, market participants feared unwinds would spread to other crowded positions, including the mammoth US Treasury-futures basis trade. Systemic meltdown briefly felt like a possibility.

Disaster was averted when Trump, citing “yippy” bond markets, announced at around 1pm on April 9 that he would pause most of his tariffs for 90 days. The 10-year auction, which was happening at the same time, went smoothly. Treasury yields quickly retreated, ending the month back where they started.

“We have seen a lot of buying of swap spreads . . . That’s obviously been the biggest trade of the year for the hedge fund community” – Daniel Gottlander, Citi (Hedge funds flock to US swap spreads on SLR easing talk, March 7)

“The swap spread has been the real pain trade” – a senior rates trader at a US bank (Trump tariffs turn swap spreads into ‘pain trade’, April 9)

“The market is trading like it’s the end of the world” – Amit Deshpande, T Rowe Price (The end of the world, or an artificial crisis?, April 9)

“The deterioration in liquidity metrics that occurred over the course of the last 48 hours was stunning” – a senior rates trader at a second US bank (Inside the week that shook the US Treasury market, April 14)

“The basis trade has many fewer tourists than the swap spread trade” – a buy-side bond trader (Dodging a steamroller: how the basis trade survived the tariff tantrum, April 30)

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War of the worlds?

The dramatic shift in US trade policy has had a lasting impact on foreign exchange trading. The US dollar dropped nearly 5% against other major currencies in April and is down around 9.5% approaching year-end.

The initial tremors were felt most severely in Asia. The Taiwan dollar (TWD) surged more than 10% against the US dollar (USD) in early May to its highest level in three years, as local life insurers aggressively covered US exposures and hedge funds unwound carry trades.

Related

European investors ramp up FX hedging as ‘dollar smile’ fades 

Analysts at one bank expect average hedge ratios to jump from 39% to 70% within six months

The TWD turmoil spilled over to other Asian markets. The Hong Kong dollar (HKD), which has been pegged to USD in a range of 7.75 to 7.85 since 1983, hit the lower boundary on May 2. Hedge funds were forced out of relative value bets and forward-based carry trades that relied on the peg holding, which put even more pressure on the currency. The Hong Kong Monetary Authority was forced to intervene on May 5, selling billions in HKD to keep the currency from breaking the peg.

The wild moves prompted investors to hedge more of their US dollar exposures. The so-called dollar smile – in which the greenback appreciates when US stocks fall, creating a natural hedge for foreign investors – had been wiped from the face of the market. For much of the year, hedging flows weighed on the USD, which eventually stabilised but failed to claw back much of its losses.   

The big question going into 2026 is whether the US dollar’s weakness is temporary or just the first stage of an ongoing shift away from US assets.

“In the current environment, you are seeing foreign investors question the stability of the US, which requires a greater hedge” – Eric Murphy, Irish Life Investment Managers (European investors ramp up FX hedging as ‘dollar smile’ fades, May 6)

“Our sense is that more people will need to up their hedge ratios over time” – Haider Ali, RBC Capital Markets (Taiwan turmoil: what drove the TWD surge?, May 8)

“People have been long [US] dollars, so there’s not a lot of vulnerability to the downside” – a hedge fund manager (Hedge funds burned as Hong Kong dollar bets implode, May 12)

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Don’t look up

The fallout from Trump’s tariff plan was also felt in European rates markets, which came into the year in a state of structural flux.

Dutch pension reforms aimed at shifting the country’s retirement system from a defined benefit model to defined contributions were expected to weaken demand for long-dated interest swaps.

Hedge funds piled into steepener trades in anticipation. But the spread between five- and 30-year swaps instead fell sharply, after Germany’s new government – pressed by Trump, like the rest of Nato – announced a surprise hike in defence spending on March 5.  

The 10-year euro swap spread, which measures the difference in nominal yields between German government bonds and the fixed leg of euro interest rate swaps, hit a record low the following day, at -17bp.

Related

Euro swap spread volatility challenges Bund’s hedging role 

German Bunds face scrutiny as euro swap spreads turn negative, forcing traders to rethink hedging strategies

Hedge funds, bruised by losses on steepeners, pivoted to shorting asset swaps – going short the German bonds and receiving the fixed leg of euro swaps – in the expectation that Bund prices would fall further.

That trade also came a cropper when Trump unveiled his tariffs on April 2. As Treasuries sold off, investors rushed to Bunds as a safe haven, pushing yields down from 2.72% on April 2 to 2.57% on April 4. Consequently, the 10-year euro swap spread snapped back to -0.6% by April 7.

The euro rates market calmed over the summer months. Hedge funds crowded back into steepener trades, only to be whipsawed as delays to Dutch pension transition caused the yield curve to fluctuate wildly.

With the deadline for the Dutch pension funds nearing and deficits piling up across the eurozone, 2026 looks set to be another volatile year for the euro rates market.

“What is the hedge for a swap? Is it a blended EGB exposure – a little bit of Germany, a little bit of France, a little bit of Austria? Is it EU bonds?” – Ankur Aneja, Barclays (Euro swap spread volatility challenges Bund’s hedging role, January 20)

“The pain trade clearly was [5s30s] on that day [March 5] – the curve flattened very aggressively” – John Mosedale, NatWest Markets (German defence announcement hits steepener trades, March 10)

“There was a lot of profit-taking on steepeners that might have been against some stops on asset swap tighteners” – Frederic Goulipian, Natixis (After tariff rout, hedge funds revive euro rate steepeners, May 12)

“There’s a risk of more tactical profit-taking on these trades, but every time we flatten, there seems to be a good amount as well to go against it” – Daniel Aksan, Morgan Stanley (Steepeners whipsawed by Dutch pension scheme shifts, October 16)

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Invasion of the policy snatchers

The near breakdown in the US Treasury market in April revived dealer calls for relief from the supplementary leverage ratio (SLR). Regulators temporarily exempted Treasuries from the SLR during the Covid-19 pandemic in 2020, and banks argued that making this policy permanent would give them additional capacity to intermediate customer trades.

Related

During Trump turbulence, value-at-risk may go pop 

Trading risk models have been trained in quiet markets, and volatility is now looming

But the collapse of Silicon Valley Bank (SVB) – brought down by unrealised losses on its Treasury holdings – made regulators wary of a sweeping exemption. Instead, they opted to replace the enhanced SLR for G-Sibs with a new buffer set at 50% of a bank’s G-Sib surcharge. The Fed estimates this change, which takes effect on April 1, 2026, will increase dealer capacity by $2.1 trillion.

It may not translate into a more liquid US Treasury market, though. When push comes to shove, critics of the rule-change doubt dealers will allocate excess balance sheet capacity to trading Treasuries over more profitable – and riskier – activities.     

“If volatility suddenly blows up because of Trump, then I would expect there will be a lot of backtesting failings down the Street” – a senior risk modeller at a European bank (During Trump turbulence, value-at-risk may go pop, Feb 5)

“I didn’t support a permanent exemption in 2020, and I definitely don’t think it would be appropriate now after SVB” – Nellie Liang, Brookings Institution (Leverage ratio reform: the good, the bad and the Treasury, May 27)

“The notion that you give eSLR relief and banks are going to buy Treasuries – I agree with the naysayers” – Steven Chubak, Wolfe Research (Fed’s new leverage ratio: the horse that never left the gate, August 14)

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The great flood

When Risk.net interviewed macro heads at some of the world’s biggest banks and hedge funds in the second half of the year, the state of the US Treasury market – and other government bond markets – was still a hot topic.

After the tariff shock, the US passed a package of tax cuts that are projected to add $3.4 trillion to the nation’s debt. The resulting deficits point to a significant ramp up in Treasury issuance over the next decade.

Related

Barclays braces for a macro storm 

Talking Heads 2025: Developed markets are racking up debt. Finding buyers could be difficult, says macro head Hossein Zaimi

Dealers fretted over who would take down the wave of US Treasuries coming to market in the years ahead. Foreign buyers may be turned off by the US’s fiscal trajectory, they argued, while real money investors might demand higher yields to increase purchases. Some questioned whether hedge funds can continue to absorb increasing Treasury issuance.

Investors were far more sanguine. Hedge funds saw “enormous opportunities” in the shifting economic landscape. Some have set aside large amounts of investor capital for up to five years to capitalise on emerging macro trends. The extended liquidity horizon should give hedge funds more flexibility to hold positions during bouts of volatility and engage in more complex, less liquid strategies – including recycling risk from bank trading desks.

With government debt issuance all but guaranteed to rise sharply, those ideas will be tested in the coming months and years.

“The sustainability of the debt in developed markets is a problem that needs to get solved one way or the other. Nobody knows how, but it needs to get solved” – Hossein Zaimi, Barclays (Barclays braces for a macro storm, September 2)

“The longer the duration of my liabilities, the more flexibility I have in running the business, which is helpful” – Aron Landy, Brevan Howard (Brevan Howard: life beyond macro, September 9)

“The market continued to function, but it didn’t feel good in that moment, and who knows what would have happened if the tariff roll-out had not been extended” – Jens Foehrenbach, Graham Capital (Nifty trades of Graham, September 19)

“I think the market can handle it – it’s just a question about price” – Jakob Horder, Morgan Stanley (Morgan Stanley sees the elephants in the room, October 2)

“Many investors were quite shocked by the degree to which the fiscal deficit is projected to continue to expand in the US” – James Houghton, Goldman Sachs (Goldman’s Houghton on Asia’s watchful bondholders, October 13)

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Judgment day

The Trump administration’s sweeping federal job cuts hit regulators hard. Most US financial regulatory agencies – including the Commodity Futures Trading Commission, Federal Deposit Insurance Commission and Securities and Exchange Commission – lost around 20% of their employees over the course of the year, while the Office of the Comptroller of the Currency saw even steeper cuts of around 30%.

Related

How staff exodus could leave the OCC high and dry 

A third of staff set to depart US regulator, but some teams will suffer much heavier losses

The layoffs at the OCC raised alarms within regulatory circles and beyond. The agency’s Economics and Risk Analysis Division (RAD), which includes around 60 to 80 financial economists and quants who work with bank examiners on model supervision, lost more than two-thirds of its workforce. Risk.net heard from current and former OCC staff that the cuts could hinder the agency’s ability to evaluate complex bank models, particularly at a time when banks are ramping up their use of AI. Those fears were bolstered when news broke in October that the Fed also plans to cut staff numbers in its regulation and supervision division by around 30% by the end of 2026.

At least one agency was spared an even worse fate. An effort by Congressional Republicans to eliminate the Office of Financial Research – which collects and analyses data on systemic risks and has seen its headcount cut by 40% since 2018 – was thwarted at the eleventh hour on procedural grounds.

The hollowing out of US regulatory bodies in 2025 could be a harbinger of future troubles.

“If you don’t have that expertise in RAD or other agencies going forward, how are the agencies really going to assess or evaluate the model validation and the risk management over AI efforts?” – Kris McIntire, former OCC deputy comptroller (Brain drain at OCC raises concerns about US model supervision, June 25)

“Regardless of what the parliamentarian decided and what Congress could put into the law to change the funding of the OFR, ultimately, the Treasury still has the authority to determine what the funding looks like” – Richard Berner, NYU (Saved by the Byrd? The fight over the OFR’s future, August 27)

“Gould is trying to get a lean fighting force and bring in younger people with skills that are more suited to today’s technologies and today’s analytics” – Gene Ludwig, former head of the OCC (How staff exodus could leave the OCC high and dry, October 1)

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Endgame

Sweeping new bank capital rules took effect at the start of 2025 in several major jurisdictions, including Canada, the European Union and Japan. The US was the most conspicuous exception.

The original Basel III endgame rules proposed by US regulators in 2023, which would have raised capital requirements by 18% on average, met with fierce opposition from the industry and were ultimately withdrawn in late 2024. The arrival of the Trump administration injected additional uncertainty.

Related

Basel uniformity fades as members defy dress code 

Rule-makers diverge from Basel III standards, denting aims of comparability and fuelling fears over fair competition

The new heads of US regulatory agencies have since embraced the idea that their version of the final Basel III standards should be capital-neutral. Achieving that will likely require significant changes to one of the pillars of the regime – the Fundamental Review of the Trading (FRTB), which is currently projected to increase US banks’ risk-weighted assets by around $300 billion. If the US deviates too far from the Basel standards, though, it could distort competition in international markets.

Other jurisdictions are now in wait-and-see mode, after pushing back their own timetables. The European Union delayed its implementation of FRTB by one year – until January 2027 – and consulted on making significant changes to the substance of the rules. Japanese regulators, who had faithfully applied the Basel standards, granted Nomura a surprise reprieve from one of the most contentious parts of FRTB: the requirement to separately capitalise non-modellable risk factors. Their European counterparts praised the move as “smart”.

US banking regulators are expected to release fresh proposals on implementing the Basel III standards in 2026. Some, though, worry the era of multilateral bank capital rules may already be over.

“It feels like comparability has gotten lost sight of during the whole Basel process” – Eric Litvack, Société Générale (Basel uniformity fades as members defy dress code, February 26)

“If the US deviates from the Basel III endpoint in a fundamental way, it will be difficult for a large jurisdiction like Europe to remain Basel-compliant” – Ignazio Angeloni, Goethe University (Mr Bessent goes to Basel: the fate of global bank regulation, May 21)

“It would be worthwhile asking those who are not implementing, why you are different?” – Shigeru Ariizumi, Japan’s Financial Services Agency (Japan FSA’s Ariizumi on Basel delays and regulating AI, July 21)

“Maybe we could import this” – a market risk manager at a European bank (Nomura wins NMRF reprieve from Japan’s FSA, August 26)

“It would be quite a bit of work to ensure that Basel III ends up being capital-neutral versus Basel 2.5 for market risk” – a risk manager at a US bank (How to solve the Fed’s $300bn FRTB problem, August 28)

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I, Robot

When generative artificial intelligence was first unleashed in 2022, most financial firms took a cautious stance. This was the year (some of) the shackles came off.

AI assistants and copilots were rolled out across the industry and firms began experimenting with broader applications of the technology. Among them, Deutsche Bank has been exploring the possibility of creating AI workers that could one day make autonomous decisions without human intervention; BlackRock has been trying to classify corporate bonds using quantum AI; hedge fund Goose Hollow created GenAI agents to debate its investment ideas, in the style of ancient Greek philosophers.

Related

How Citi moved GenAI from firm-wide ban to internal roll-out 

Bank adopted three specific inward-facing use cases with a unified framework behind them

Even regulators got in on the act. Researchers at the Swiss National Bank used large language models (LLMs) to analyse sentiment in the foreign exchange market, while supervisors in Hong Kong turned to GenAI to improve oversight of non-bank financial institutions. A study by academics at Stanford University, co-authored by a former Fed economist, concluded that one in four staff at the US central bank could benefit from GenAI tools.

A Risk.net survey, published in February, attempted to cut through some of the noise, finding that 15 different front office use-cases – from research and trade idea generation to optimal execution and deep hedging – were all in various stages of development at large banks.

This surge in AI adoption also spurred warnings about what could go wrong. One academic study found trading strategies generated by LLMs exhibited “very weird, correlated trading behaviour” that could amplify market risks. The author was subsequently contacted by regulators, including the Securities and Exchange Commission and the Fed, concerned about the findings.

“We very much position [GenAI] as something to help people do their jobs better and do some of the boring work” – Jonathan Lofthouse, Citi (How Citi moved GenAI from firm-wide ban to internal roll-out, February 13)

“Is it primarily the potential labour shortages and wage pressures [that matter], or do you believe reduced consumer demand and increased savings could play a larger role?” – AI Socrates (Quants try investing like Socrates, with help from AI, February 13)

“[Quantum cognition machine learning] seems to be especially appropriate for identifying similar bonds in markets like US high yield where yield and other bond features show greater variability” – Joshua Rosaler, BlackRock (BlackRock tests ‘quantum cognition’ AI for high-yield bond picks, February 21)

“All of these applications are perfectly valid things to be revolutionised” – Giuseppe Nuti, UBS (Everything, everywhere: 15 AI use cases in play, all at once, February 25)

“The concept of an AI worker is something that is really buildable” – Tim Mason, Deutsche Bank (Deutsche Bank casts a cautious eye towards agentic AI, June 19)

“As generative AI and tools like ChatGPT become more mainstream, we’re leveraging them to help analyse sentiment towards these entities in real time” – Henry Yun Fat Chan, Hong Kong Monetary Authority (Hong Kong watchdog taps GenAI to monitor shadow banking risk, July 1)

“The bad news, the potential systemic risk news, is that LLMs behave differently to humans” – Alejandro Lopez Lira, University of Florida (Academic warns of systemic risk from AI-powered trading, July 18)

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The day the trades stood still

Over the summer, much of the market was gripped by a drama that pitted the world’s most profitable proprietary trading firm against India’s markets regulator.

An interim order issued on July 3 accused Jane Street of manipulating local stocks and derivatives – including on January 17, 2024, when the regulator claims the firm booked a total profit of $84 million from trades in India – and temporarily banned it from trading in the country’s securities market.

Related

Traders hedge on Jane Street manipulation claims 

Market-makers side with Sebi, while bankers accept arbitrage explanation. Most want more details.

Jane Street denied any wrongdoing, telling employees in an internal email that its Indian arm was pursuing a legitimate index arbitrage strategy.

Risk.net’s reporting revealed there was more to it. Analysis of trade-level data released by the regulator suggested Jane Street employed a range of quantitative strategies in India, from relative value plays to more directional bets based on fundamental or technical signals. A senior source at Jane Street confirmed the findings, telling Risk.net that while the firm did arbitrage index mispricings immediately after the open on January 17, much of the day’s trading was directional, driven by short signals triggered by disappointing earnings and bullish retail demand for options. The source insisted the strategies operated independently and that the regulator was wrong to present the tangle of overlapping trades as a single, manipulative scheme.   

The case is ongoing. Jane Street appealed the regulator’s order and deposited the alleged illegal profits in an escrow account to regain access to the Indian market. A final decision is expected in early 2026. The accusations did little to dent Jane Street’s profitability. The firm raked in over $24 billion in net trading revenues in the first nine months of 2025, outpacing every large bank except JP Morgan and Goldman Sachs.

“If we were doing this trade, our internal flags would be going off with flashing red lights everywhere” – a source at a US trading firm (Traders hedge on Jane Street manipulation claims, July 12)

“If US regulators run data analytics and see a manipulative pattern of trading, I can see a case being opened” – a former SEC enforcement lawyer (Jane Street rivals call for wider probes of manipulation claims, July 15)

“Why would Jane Street continue to sell options after the basis was closed?” – a senior trader at a US market-making firm (More than arb: the short signals behind Jane Street’s India troubles, August 12)

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Deep impact

Throughout the year, Risk.net’s expanded benchmarking coverage provided a unique glimpse at the inner workings of bank risk functions.

Five benchmarks were completed and published in 2025 – our long-running map of top operational risks, plus four others exploring op risk management, enterprise risk management (ERM), derivatives valuation adjustments and asset/liability management. A sixth, on climate risk, will appear in early 2026. In all, more than 150 banks participated in the exercises, shining light on a host of trends, themes – and stark differences. 

Nowhere was this more apparent than in ERM. While the majority of banks agree on the core responsibilities that sit within the scope of enterprise risk, big differences emerge when it comes to resourcing, empowerment and the wider range of duties they encompass – even among peers. One big US bank puts the size of its ERM team at 450, another at 20. Nearly three-quarters of ERM teams are consulted on capital planning, but just 11% have formal veto rights. For product launches, more than half are consulted, and a quarter hold a veto.

Related

More than half of banks manage change as an operational risk 

Others are moving to incorporate it into risk taxonomies, although some now treat it as a cause, citing supervisory guidance

The XVA Benchmarking data reveals a similar mix of differences and commonalities. Most banks – nearly 75% – have a central XVA desk and rely on established methods to model valuation adjustments for each major asset class. But there are big differences when it comes to resourcing, optimisation and recognition of XVAs. Tech budgets vary as much as tenfold even between large global dealers, model run times range from less than one hour to more than six, while a significant minority of firms still do not recognise funding and capital valuation adjustments for pricing or accounting.

The big new trend in operational risk management is the recognition by 45% of banks that change management is a distinct op risk that needs to be managed accordingly.

In ALM, the common pattern repeats – at a high level, banks look broadly similar, but differences quickly appear. For example, the vast majority of teams sit within a bank’s group treasury function, but team sizes range from fewer than 10 at some regional banks to 350 at one global bank. All banks run internal liquidity stress tests, of course, but some focus on the kind of same-day stress that killed SVB, while many others are only looking at stress over horizons of 30 days or longer.

“The bank is actively working on an update of the operational risk taxonomy – with change management to feature post formalisation” – op risk manager at a participating bank (More than half of banks manage change as an operational risk, August 6)

“I know two of my G-Sib friends up the Street who just aren’t interested in making an ERM function” – ERM head at a US bank (North American banks outpace European peers in ERM, September 23)

“We have one person with a quantitative profile, but the rest are practical risk-takers – people who’ve worked in sales or on trading desks” – XVA head at a US bank (Squashing CVA still dominates XVA desks’ priorities, December 5)

“The regulator has more and more focus on intraday liquidity ... I just find it very strange indeed that there are banks who start at 60 days, or even longer horizons” – ALM head at a European bank (Many banks ignore spectre of SVB in liquidity stress tests, December 23)