[SINGAPORE/LONDON] US Treasuries, the bedrock of the global financial system, were hit by fresh selling pressure on Wednesday (Apr 9) in a sign that investors were dumping their safest assets as turmoil unleashed by US tariffs prompted forced selling and a dash for cash.
The 10-year Treasury yield had risen 39 basis points (bps) to 4.38 per cent this week alone as prices tumbled. If sustained, that would mark the biggest weekly jump since 2013.
The rout in the roughly US$29 trillion Treasury market dragged borrowing costs across the globe higher, raising pressure on central banks and policymakers to act fast to shelter economies now facing a sharp slowdown as US tariffs kick in.
Japan will cooperate with the Group of Seven advanced economies and the International Monetary Fund to help stabilise a market rout unleashed by US tariffs, the country’s top currency diplomat said on Wednesday.
Japanese 30-year government bond yields surged to 21-year highs and Britain’s 30-year bond yields rose to their highest since 1998.
“This is beyond fundamentals right now. This is about liquidity,” said Jack Chambers, senior rates strategist at ANZ in Sydney.
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The 10-year US Treasury yield, the globe’s benchmark safe-haven anchor, was unmoored, and long bonds were the focus of intense selling from hedge funds, which had borrowed to bet on usually small gaps between cash and futures prices.
It briefly crossed 4.5 per cent on Wednesday, even as traders ramped up expectations for US rate cuts and, in another signal of dislocation in markets, the US dollar fell against the euro and yen.
Thirty-year Treasury yields rose 15 bps to 4.86 per cent. They have surged 47 bps over three days, their biggest three-day jump since 2020.
The sell-off in long-dated bonds pushed the gap between two- and 10-year yields to the widest since 2022.
“You look at what happened to the curve last night, that was pretty extreme by anyone’s metrics – twos-10s steepening 30 basis points in a few hours, I’ve certainly never seen that,” said Candriam senior fixed income portfolio manager Jamie Niven.
Stemming a crisis
Japan’s central bank, finance ministry and banking regulator called an unscheduled meeting to discuss the moves, which pulled back some of the extreme selling.
Rising government borrowing costs filter across to corporate loans and mortgages, meaning what happens in bond markets can cause economic damage to businesses and households.
The US Federal Reserve may need to cut rates by more than expected or offer a targeted lending facility, similar to the measures taken during the Covid and global financial crises, some analysts said.
“(We) would expect to have some central bank response in the near term if markets continue to behave like they have been in the last 12 to 24 hours,” said Mark Elworthy, Bank of America’s head of fixed income, currency and commodity trading in Australia.
Others have pointed to potential changes in global trade flows over the long run slowing foreign buying of US debt or that foreign holders could turn sellers.
Soft demand for the US Treasury’s US$58 billion auction of three-year notes fuelled worries about tepid interest in the US$39 billion sale of 10-year notes and a US$22 billion auction of 30-year bonds on Thursday. The cost of insuring against a US default, meanwhile, has risen.
“Markets are now concerned that China and other countries could ‘dump’ US Treasuries as a retaliation tool,” said Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong.
Basis trade
Warning signals have flashed for a few days as spreads between Treasury yields and swap rates in the interbank market collapsed under the weight of bond selling.
Hedge funds were at the heart of it because their lenders could no longer stomach large positions betting on small differences between cash Treasuries and futures prices, or swaps, as markets started to swing on tariff headlines.
“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.
The so-called “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.
As they dumped Treasuries 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.
“There is of course the bond basis trade that is being unwound,” Deutsche Bank’s George Saravelos said in note.
“But there is something larger at play as well: a policy objective of reducing bilateral trade imbalances is functionally equivalent to lowering demand for US assets as well.” REUTERS
