Global investors typically move to the perceived safety of US debt in times of market tumult. But the jump in yields raises fears about whether investors are beginning to question US debt as a haven.
What is happening?
People around the world are selling US Treasurys, which is very unusual when the stock market tanks. Generally when stocks lose value, investors have moved money into the bond market.
But in the past few days, money has been seeping out of the bond market, which is making these bonds much cheaper generally. That is pushing yields on bonds higher, because bonds move inversely to their prices.
Why is this happening?
There could be several reasons for the jump in yields, from potential boycotts by foreign buyers retaliating against tariffs to investors “rebalancing” their portfolios by selling Treasury bonds for cash, according to Lawrence Gillum, chief fixed-income strategist for LPL Financial.
In a research note, Gillum said the larger cause is probably yet another culprit: the unwinding of the “basis trade”, in which hedge funds take advantage of tiny pricing differences between Treasury bonds and Treasury futures contracts. It was a big reason Treasury yields spiked higher during the coronavirus crisis despite the sell-off in equities, he said.
In other words, funds that rely on leverage, or borrowed money, to buy Treasury bonds may be selling those instruments to meet margin calls or to pare back on borrowing at a time of heightened market volatility.
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Still others fear that the rise in yields is so significant as to raise concerns about how foreign investors now perceive the United States after Trump imposed vast new tariffs. The US enacted a 10% baseline tariff on all imports from virtually all countries over the weekend – plus an additional punitive import tax tailored for each of about 60 countries, with duties on Chinese goods raised 104% on Wednesday. China quickly responded with an 84% duty on all US goods and has said it won’t back down.
Former US treasury secretary Lawrence H. Summers said the broad stock-and-bond sell-off reflected a “highly unusual pattern” that suggests “a generalised aversion to US assets in global financial markets”. He warned about the possibility of “a serious financial crisis wholly induced by US government tariff policy”.
What are administration officials saying?
US Treasury Secretary Scott Bessent sought to play down the sell-off, minimising it as “uncomfortable but normal deleveraging” in the bond market, speaking on Wednesday on Fox Business.
“There’s one of these deleveraging convulsions that’s going on right now in the markets,” said Bessent, adding that he had witnessed those often in his decades-long hedge fund career. “It’s in the fixed-income market. There are some very large leverage players who are experiencing losses – that are having to deleverage.”
He added there was “nothing systemic” about the episode.
Bessent had previously celebrated a short-lived drop in interest rates as a sign of the success of Trump’s economic programme.
Why is this sell-off in the bond market concerning?
The United States has trillions of dollars of debt financed by US Treasurys. Any move away from Treasurys could show early signs that some investors are losing confidence in the United States and perhaps its ability to make good on its promises to pay off those who buy US debt.
“The sell-off may be signalling a regime shift whereby US Treasurys are no longer the global fixed-income safe haven,” said Ben Wiltshire, a rates strategist at Citi, according to the Financial Times.
Krishna Guha of Evercore ISI noted that the reduced global demand may in part relate to the risk of stagflation – the possibility of high inflation and low growth in the US. But, he said, it seems more driven by a loss of confidence in US decision-making, reduced attractiveness of dollars when the US is destroying the existing geopolitical and economic order it created, as well as other factors.
If the stress gets bad enough, the Federal Reserve will come under “intense pressure” to step in but has few easy policy choices, he added.