Treasury Market Turmoil Prompts Fed Intervention Calls, Bitcoin Gains 15% Yearly

Investors are increasingly concerned about the $29-trillion U.S. Treasury market, which is showing signs of distress that could prompt the Federal Reserve to intervene. This situation could potentially benefit Bitcoin if the central bank injects more liquidity into the markets, according to one analyst. Benchmark yields have been rising since a selloff on Monday, with ten-year yields hovering around 4.36% on Thursday. This increase in yields has been attributed to inflation concerns and foreign selling, but analysts suggest that the unwinding of Treasury basis trades is a significant factor.

Hedge funds have accumulated $1 trillion worth of leveraged positions in the bond market, aiming to profit from small price differences between Treasury futures and current Treasury securities. The unwinding of these positions is causing substantial selling pressure on Treasuries, reminiscent of a carry trade involving the Japanese Yen that disrupted markets in August. This forced selling could have a ripple effect on the broader financial ecosystem, including the Bitcoin and crypto markets.

In 2020, when U.S. Treasury basis trades were unwound, the Federal Reserve took several actions to stabilize the market, including purchasing massive amounts of securities and expanding repurchase agreements. If the Fed intervenes again, it could involve injecting liquidity, which might boost the crypto market. Bitcoin has fallen about 4% since the beginning of the month due to tariff considerations but is still up 15% over the past year. Some analysts suggest that Bitcoin is returning to its roots as a hedge against economic uncertainty.

The unwinding of basis trades has caused significant turmoil in the financial markets, with a sharp rise in Treasury yields potentially triggering a liquidity crisis and deepening the sell-off in risk assets. This coincides with President Donald Trump’s newly announced global tariff regime, exacerbating fears of inflation and a recession. The bond market’s dysfunction is not isolated; crude oil prices have also collapsed, signaling broader systemic stress.

At the heart of this turmoil is the basis trade, a leveraged strategy employed by hedge funds to exploit price discrepancies between Treasury futures and the underlying bonds. The rapid deleveraging has caused bond prices to plummet as yields spike, eroding the safe-haven status of US Treasuries. As yields soar, the implications for the broader financial ecosystem, including the Bitcoin and crypto markets, are profound. Bitcoin and other digital assets have often been touted as hedges against traditional financial instability, yet their performance in recent months has shown a growing correlation with risk assets like equities. As S&P futures tumbled by -12% over the past 4 trading sessions amid the bond market rout, BTC is down -8% as it faces a spillover effect. The US Dollar Index (DXY), which has risen since Thursday’s low, indicates net foreign buying into US markets, countering speculation that China is offloading Treasuries to “punish” the US over tariffs.

The primary driver of the bond market sell-off is likely tied to the forced liquidation of leveraged positions rather than foreign intervention. Amid this turmoil, calls for Federal Reserve intervention have grown louder. Some market participants have speculated about the possibility of an emergency rate cut to stem the bleeding, something which could be extremely bullish for Bitcoin. The unwinding of basis trades can create a cascading effect that causes yields to surge, or even worse, the Treasury market to seize up, much like what occurred in 2020. This development is particularly alarming as it coincides with President Donald Trump’s newly announced global tariff regime, exacerbating fears of inflation and a recession. The bond market’s dysfunction is not occurring in isolation; crude oil prices have also collapsed, signaling broader systemic stress.