U.S. Treasury Yields Surge 4.51% Amid Global Sell-Offs, Recession Fears

The U.S. Treasury market is currently navigating a complex landscape, with multiple factors converging to create a perfect storm. Global yield rates have been climbing, with U.S. Treasury yields at the forefront of this trend. The 10-year Treasury yield briefly touched 4.51%, and the 2s10s yield curve steepened by over 30 basis points within a week. This abrupt shift is driven by several key factors, including liquidity issues, foreign investor sell-offs, a reassessment of the dollar and U.S. Treasuries as safe-haven assets, the unwinding of basis swaps and asset swaps, escalating inflation, and the looming threats of economic recession and double-digit fiscal deficits.

As a result, margin calls are expected to follow, and U.S. Treasuries will not be spared from investor liquidation. This aligns with the recent decline in the U.S. dollar. The simultaneous drop in stock markets, U.S. Treasuries, and the dollar indicates capital outflows, reflecting a global reassessment of U.S. assets as safe havens in the wake of tariffs and the weaponization of the dollar.

The unwinding of basis swaps and asset swaps is exacerbating the chaos. As liquidity deteriorates and investors perceive increased risk in holding U.S. Treasuries, the basis swap spread has plummeted. Given the substantial size of basis swap transactions and the significant leverage involved, there is a potential for severe disruption to financial market stability, similar to the events witnessed in March 2020. In extreme scenarios, the Federal Reserve may need to intervene.

Underpinning all these developments is the persistent issue of the U.S.'s massive fiscal deficit, which is fueling inflation and supply risks. Now, there is a real possibility of an economic recession, with these deficits potentially exceeding 10% to 11% of GDP. For U.S. Treasuries, this confluence of factors represents a perfect storm, and price movements are reflecting this turmoil.