Donald Trump Is Causing A 'Treasury Dump', Or Is He?

A wave of selling in long-term U.S. Treasury bonds is quietly underway—and even accelerating. Some say this may be due to the escalation of the trade war shaking confidence in U.S. Treasuries as a safe-haven asset, while others suggest that such large-scale selling is likely driven by a certain behind-the-scenes player starting to make its move.

On Wednesday, the yield on 30-year U.S. Treasuries surged by 25 basis points, reaching its highest level since November 2023. This week alone, the cumulative increase in yields for this traditionally safe asset during turbulent times has exceeded 0.5 percentage points.

"This is a fire sale of Treasuries,"  said Calvin Yeoh, a portfolio manager at hedge fund Blue Edge Advisors Pte., commenting on the recent sharp fluctuations. He also noted that he has been selling futures on 20- to 30-year Treasuries. "This is like ice sculpting in a forest fire — whatever looked good a second ago is now gone."

Could the Plunge in U.S. Stocks Be the Real Culprit?

Some market participants argue that the current sell-off in U.S. Treasuries is more likely due to losses in cross-asset portfolios, as investors—including hedge funds—are forced to offload liquid assets like Treasuries to meet margin calls, given the extreme volatility and sharp narrowing of swap spreads in the bond market.

"The big moves in the market across asset classes triggered the unwind," said Jan Nevruzi, a U.S. rates strategist at TD Securities in New York. Investors and analysts note that this resembles the "dash for cash" during the COVID-19 pandemic in 2020, when fears of the virus triggered a liquidity crisis, ultimately prompting the Federal Reserve to intervene with trillions in Treasury purchases to stabilize the market.

"When you have big moves like that and you're relying on some arbitrage relationship, spreads tightening for whatever reason, you might have to trim your positions," Nevruzi explained. In recent years, regulators have closely monitored basis trades, as rapid unwinding of highly leveraged hedge fund positions could destabilize markets. This would weaken banks' ability to provide liquidity or act as intermediaries in the Treasury market, the cornerstone of the global financial system.

Many analysts and investors point out that hedge funds typically finance Treasury purchases through the repo market, using the bonds as collateral. A sell-off-driven drop in Treasury prices reduces collateral value, triggering margin calls. There has indeed been a significant unwinding of basis trades in recent days, with some banks receiving margin calls, said David Rolley, co-head of global fixed income at Neuberger Berman.

Alternative Explanations: China?

From an asset perspective, professional institutions offer varying explanations for the plunge in U.S. Treasuries. One theory is that the bond market is gradually realizing that Trump's tariff hikes could fuel inflation, limiting the Fed's ability to cut rates in an economic slowdown.

Other investors believe that given the strong hostility exposed by Trump's trade policies toward certain countries, the recent Treasury sell-off may go far beyond a simple cash grab. Instead, it could reflect global holders (such as China) reassessing their Treasury positions. From this perspective, it sends a strong signal that U.S. Treasuries may no longer be the safe haven they once were.

Official data shows that China and Japan, long-time major holders of U.S. debt, have been reducing their holdings in recent months.

"China may be selling them in retaliation for tariffs," said Kenichiro Kitamura, general manager of investment planning and research at Meiji Yasuda Life Insurance. He believes that Treasuries are now experiencing volatility driven by political factors rather than supply and demand, which will make more investors hesitant.

"The extremely hostile 100%+ tariffs on China may be causing great concern to reserve managers," added Rajeev De Mello, a global macro portfolio manager at Gama Asset Management, acknowledging this possibility.