U.S. Treasury investors were left bruised on Wednesday despite a temporary pause in U.S. tariffs, as some funds were forced to sell bonds in a dash for cash while others called into question the bonds’ status as the world’s safest asset.
Yields on 10-year Treasury notes, which had jumped to a seven-week high, maintained higher levels after President Donald Trump said on Wednesday he authorized a 90-day pause for most of his new tariffs but was raising the tariff rate for China to 125%, effective immediately.
At different points during volatile trading, the run-up in yields so far this week topped the biggest weekly jump since 2001.
The dollar, also a traditional safe haven but which had weakened against other major currencies, rebounded, as did U.S. stocks, after Trump’s announcement.
Analysts and investors across the globe pointed to the sell-off in Treasuries this week as evidence that confidence in the world’s biggest economy has been shaken.
“The market has lost faith in U.S. assets,” Deutsche Bank analysts wrote in a research note earlier on Wednesday before Trump’s announcement.
Marc Rowan, CEO of Apollo Global Management, the massive alternative asset manager, said in a CNBC interview that he was worried about damage to the U.S. brand.
As U.S. trading got underway on Wednesday, some analysts said the situation had deteriorated in some corners of the market where investors had loaded up on debt.
Even so, three market sources said dislocations had not hit crisis levels and that trading, though volatile, had been orderly.
An afternoon auction of 10-year Treasury bonds, which had been a focus of the market, came in within market expectations. The auction results provided further relief to the market.
Even so, questions on the outlook remained.
“The 90-day suspension does allow nice breathing room to allow negotiation to settle in and market valuations have clearly been reset,” said Carol Schleif, chief market strategist at BMO private wealth. “Yet the uncertainty for companies remains.”
In the past, moves of this magnitude in global markets have tended to elicit a forceful response from major governments and central banks, with the United States leading the way.
On Wednesday, however, the world’s largest economy was absent from an announcement that Japan and Canada, which chairs the G7 developed economies, had agreed to cooperate to maintain stability in financial markets and the global financial system.
Before Trump’s tariffs announcement on Wednesday, Treasury Secretary Scott Bessent downplayed the market rout. In a morning interview with the Fox Business Network, he said he expected the bond market to calm down and had not seen anything systemic about the selloff so far.
After the tariff pause, Bessent said the market did not understand that the tariff plan was maximum levels. He also noted that the 10-year bond auction had been good.
The rise in Treasury yields, which move inversely to prices, dragged borrowing costs across the globe higher, raising pressure on central banks and policymakers to act fast to shelter economies facing a sharp slowdown.
Rising government borrowing costs also filter through to corporate loans and mortgages, meaning what happens in bond markets can cause economic damage to businesses and households.
Left unchecked, they can also hamper policymakers’ ability to pursue their agenda, as “bond vigilantes” make it punishingly expensive for governments to borrow.
The Japanese 30-year government bond yield surged to 21-year highs and Britain’s 30-year bond yields rose to their highest level since 1998 , . In contrast, German 10-year bonds were steady.
FORCED SELLING
The Treasury market is the bedrock of the global financial system, with investors, banks and others holding U.S. bonds in large quantities as a safe investment that can be easily sold to raise money when needed.
One source of the selling pressure, several market participants said, came from hedge funds that had taken on debt-fueled bets in the Treasury market that they then had to unwind as brokers demanded they post margins or additional collateral to back their trade. As a result, they were selling Treasury bonds to raise funds.
These “basis trades” are typically the domain of macro hedge funds. They rely on selling futures contracts or paying swaps and buying cash Treasuries with borrowed money, with a view to exploiting slight price differences.
“When the prime broker starts tightening the screws in terms of asking for more margins or saying that I can’t lend you more money, then these guys obviously will have to sell,” said Mukesh Dave, chief investment officer at Aravali Asset Management, a global arbitrage fund based in Singapore.
Warning signals have flashed for a few days, as the difference between Treasury yields and swap rates, a type of interest rate derivative, in the interbank market collapsed under the weight of bond selling.
As Treasuries were dumped this week, bond yields have soared and fallen out of sync with swaps . At the 10-year tenor, the gap has shot to 64 basis points, the largest on record.
Another sign: Long-dated bonds, used by hedge funds in the basis trades, saw yields rise. Thirty-year Treasury yields rose 12 bps to 4.835%. At one point, they clocked their biggest three-day jump since 1982 .
The selloff in long-dated bonds also pushed the gap between two- and 10-year yields, a closely watched metric called the yield curve, to the widest since 2022.
“You look at what happened to the curve last night, that was pretty extreme by anyone’s metrics – 2s-10s steepening 30 basis points in a few hours; I’ve certainly never seen that,” said Candriam senior fixed income portfolio manager Jamie Niven.
Some analysts and investors said another factor was driving the market sentiment: A longer-term structural shift is taking place.
Trump’s tariffs are changing the makeup of global trade flows, which over the long term could slow foreign buying of U.S. debt as deficits reduce. There were also worries that major foreign holders, such as China and Japan, could turn sellers.
“Markets are now concerned that China and other countries could ‘dump’ U.S. Treasuries as a retaliation tool,” said Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong.
Reprinted from Reuters
