U.S. Treasuries Yields Surge 20% as Safe Haven Status Wavers

On Monday, while all market participants were focused on the "tariff delay rumor" that caused a rollercoaster ride in U.S. stocks, a more peculiar movement was unfolding in the U.S. Treasury market. Over the past 24 hours, U.S. Treasuries, once considered the "king of safe havens," experienced a sudden and dramatic sell-off. The yield on 10-year U.S. Treasuries nearly returned to the levels seen before President Trump announced retaliatory tariffs. This historic sell-off caused yields on almost all medium- and long-term Treasuries to surge by more than 20 basis points during Monday's trading session, with the 30-year bond yield rising nearly 23 basis points by the end of the day, marking the largest single-day increase since the early days of the COVID-19 pandemic in March 2020.

The trading pattern of U.S. Treasuries on Monday was almost inexplicable: unlike the U.S. stock market, which saw a surge and subsequent decline due to the "false rumor" of tariff delays, Treasury yields rose steadily throughout the day. Market traders seemed determined from the start to sell off bonds en masse. Interestingly, the peak in Treasury prices, or the halt in yield declines, had already begun to show signs as early as Friday, when China announced retaliatory tariff measures against the U.S. In other words, the U.S. market had already experienced a "stock and bond double whammy" during the European and U.S. trading hours on Friday, although the decline in Treasuries was not as pronounced as that in stocks. By Monday, however, the main actor in the market's sell-off had become the once-revered safe-haven asset, U.S. Treasuries.

This scenario was seen as "desperate" by many on Wall Street. Against the backdrop of poor performance by the other two major safe-haven assets, the U.S. dollar and gold, U.S. Treasuries now seemed to be proving that they were not entirely safe havens, even as high-ranking officials in the White House, including Powell and Bentsen, had been eager to see Treasury yields fall to achieve their debt reduction goals. So, what caused the unusual volatility in Treasuries on Monday, and what were the lesser-known "hidden factors" behind the bond market's turmoil?

According to interpretations from Wall Street institutions, there was no clear consensus among industry experts on the cause of Monday's panic selling in Treasuries. However, several theories emerged. One theory suggested that the sell-off was due to the unwinding of basis trades and the need for cash. Gennadiy Goldberg, a strategist at TD Securities, described the sell-off as a "catch-all, everywhere" trading pattern. He added that cross-asset funds were trying to de-lever, leading to a "sell everything" trade. Many investors and analysts pointed to hedge funds that engage in basis trades, exploiting small price differences between Treasury prices and related futures contracts. These funds are major participants in the fixed-income market, and as they reduce their risk exposure and unwind these positions, it triggers a sell-off in Treasuries.

A hedge fund manager who attributed the yield movements to basis trades noted that broader hedge fund selling was "destroying" the liquidity of Treasuries, high-grade corporate bonds, and mortgage-backed securities, making it difficult to buy and sell these assets easily. The fund manager stated, "There is currently a massive de-leveraging taking place, and all sources of liquidity are being tapped." James Athey, a portfolio manager at Marlborough Investment Management, also pointed out that there might be a disconnect between the cash prices of bonds and derivatives, and that the sharp rise in Treasury yields on Monday resembled the volatility seen in March 2020, which was likely related to basis trades. He noted that there were no signs of hedge funds stopping their basis trades in Treasury futures last week, but suddenly, yields began to surge.

Ed Al-Hussainy, a senior rates analyst at Columbia Threadneedle Investments, suggested that investors were moving into cash and cash-like assets to weather the market volatility. He explained that the simplest explanation for the yield movements was that investors were selling whatever they could to take a defensive stance. However, selling stocks would lock in losses, so the most readily available option was to sell Treasuries to raise cash. From a volatility perspective, the MOVE index, which measures the implied volatility of Treasuries, surged above 125.7 on Monday, reaching a new high for the year.

Beyond the short-term position adjustments and liquidity issues, some industry experts are concerned about the potential impact of President Trump's tariff measures on global trade, which could further affect or disrupt the traditional safe-haven status of Treasuries. Some traders are monitoring whether large foreign holders of Treasuries show any signs of reducing their holdings and are worried that foreign buyers may be scarce in upcoming Treasury auctions. The U.S. Treasury is set to auction a total of $119 billion in coupon-bearing securities this week, including $58 billion in three-year notes on Tuesday, $39 billion in 10-year notes on Wednesday, and $22 billion in 30-year bonds on Thursday. The demand for Treasuries may be put to the test. Simon White, a macro strategist, believes that U.S. Treasuries are losing their safe-haven status. As the dollar's reserve currency status declines, capital is flowing out of the U.S. at an accelerating pace, and an economic recession could push the fiscal deficit to far above 10% of GDP, posing a serious risk of a buyer's strike for Treasuries.

White noted that U.S. Treasuries would ultimately not escape this key shift in capital flows. Following the Russia-Ukraine conflict, Russian assets were seized, making foreigners more cautious about holding U.S. Treasuries. Discussions about the Sea Lake Agreement further eroded confidence, raising doubts about the principle that the dollar is a tool free from political interference. White stated that stocks are currently the focus of global capital re-evaluation, but bonds could be the next target. Despite slower growth in recent years, foreign holdings of U.S. Treasuries and other U.S. debt remain substantial. Currently, foreign investors hold nearly $15 trillion in U.S. Treasuries, with about half being U.S. Treasuries, accounting for 30% of the tradable U.S. Treasuries. Unless tariffs are significantly reduced, the world will face an impact on global economic growth. The Treasury market typically serves as a safe haven, but the standard rules of international finance are being upended. U.S. Treasuries and the dollar are no longer the risk-free tools they once were.

White believes that "when an asset is used as a political tool, it is no longer risk-free; when it faces greater supply surpluses, it is no longer risk-free as the prospect of a recession intensifies. But crucially, as the debt issue discovered after Brexit, when the country issuing the asset itself becomes a source of risk, the asset is no longer risk-free."