U.S. Treasuries experienced significant losses on Wednesday. Investors are selling even their safest assets. A global market rout, triggered by U.S. tariffs, is taking a troubling turn towards forced selling and a rush for cash.
Jack Chambers from ANZ in Sydney said, “This is beyond fundamentals right now. This is about liquidity.”
The 10-year U.S. Treasury yield, the benchmark safe-haven, became unstable. Hedge funds intensely sold long bonds. They had borrowed money to capitalize on small price differences between cash and futures.
It rose sharply, exceeding 4.5% at one point. Traders increased expectations for U.S. rate cuts. The dollar fell against the euro and yen, signaling market disruption.
Japan’s central bank, finance ministry, and banking regulator scheduled an emergency meeting for 0700 GMT. They aimed to discuss the market movements, which slightly reduced the extreme selling pressure.
The 10-year yield was up 16 basis points in Asia at 4.41%. It had risen more than 50 basis points from Monday’s low.
A three-day increase of almost 60 basis points in 30-year yields would mark the heaviest selloff since 1981 if it continues. The 30-year yields spiked above 5%.
The selloff spread beyond Treasuries to Japan. The Japanese 30-year government bond yield reached 21-year highs.
Mark Elworthy, Bank of America’s head of fixed income, currency, and commodity trading in Australia, stated, “This is up there with GFC and COVID level of volatility. Would expect to have some central bank response in the near term if markets continue to behave like they have been in the last 12-24 hours.”
Warning signs had appeared in recent days. Spreads between Treasury yields and swap rates in the interbank market collapsed due to heavy bond selling.
Hedge funds were central to this situation. Their lenders could no longer accept large positions betting on small differences between cash Treasuries and futures prices or swaps. Markets began to fluctuate due to tariff news.
Mukesh Dave, chief investment officer at Aravali Asset Management, a global arbitrage fund in Singapore, explained, “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.” The Dow closed down more than eight-tenths of a percent.
Macro hedge funds typically engage in “basis trades.” They sell futures contracts or pay swaps. They also buy cash Treasuries with borrowed funds. They aim to exploit slight price differences.
As they sold Treasuries this week, bond yields have risen significantly. They have fallen out of line with swaps. The gap at the 10-year tenor has reached 64 basis points, the largest ever recorded.
On Wednesday, the highest U.S. tariffs in over a century took effect, disrupting global markets. Strategists said a broader discussion about the future of Treasuries as the core of the global financial system had begun.
Ben Wiltshire, G10 rates trading desk strategist at Citi, commented, “The UST selloff may be signalling a regime shift whereby U.S. Treasuries are no longer the global fixed-income safe haven.”
Others suggested that changes in global trade flows over the long term could slow foreign purchases of U.S. debt or that foreign holders might sell.
Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong, said, “Markets are now concerned that China and other countries could ‘dump’ U.S. Treasuries as a retaliation tool.”
Regardless, the speed of the selloff indicated distress.
Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management in Tokyo, noted, “Yields on super-long bonds have moved up to beyond the level they were at before Trump announced the tariffs, this is like panic selling.”
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