US Treasuries saw a significant retreat on Tuesday as investors were forced to sell bonds to cover losses in other asset classes, signaling growing stress in the financial markets.
The sharp moves, which included one of the largest daily ranges in the benchmark 10-year yield in two decades, were accompanied by the collapse of expectations for deep US rate cuts in the near term.
On Monday, the 10-year Treasury yield surged from a low of 3.87% to as high as 4.216% during the Asian trading session. The swift changes in bond yields and the uncertainty surrounding Federal Reserve policy were unprecedented, with traders revising down their expectations for 130 basis points of US rate cuts this year to just 92 basis points within hours.
The size of the moves and the heightened volatility in bond prices raised concerns about the broader stability of financial markets. Monday’s yield range of 35 basis points was among the eighth-largest in the past 25 years, according to Tradeweb data. The rapid selloff also led to a widening gap between bond yields and swap rates, with the 10-year spread reaching a record 50 basis points.
The selloff in Treasuries, typically viewed as one of the safest investments, highlighted the market’s ongoing instability. The catalyst for the sudden turn from buying to selling is not entirely clear, but analysts point to growing pressure on stock markets and concerns about the approaching April 9 deadline for US tariffs. The S&P 500, for instance, saw a sharp decline, losing 10.7% over just three sessions.
Martin Whetton, head of financial markets strategy at Westpac, suggested that the selling could be driven by margin calls or a scramble for liquidity.
“What do you sell if you need to meet margin calls or liquidity? Treasuries and gold,” he explained.
The lack of buyers in the bond market further exacerbated the situation, with prices falling sharply and yields rising. The 10-year Treasury yield saw its biggest daily jump since September 2022, while the 30-year yield experienced its largest move since March 2020. This marked a significant departure from the traditional pattern where Treasuries perform well in times of market uncertainty.
Several factors have contributed to the selloff. Hedge funds, in particular, were involved in unwinding their positions in Treasuries, with many cutting back on risk in response to the volatility triggered by US tariffs. This was further compounded by a general move towards cash as investors sought refuge from market turbulence.
“Hedge funds have been liquidating US Treasury basis trades furiously,” said one hedge fund manager.
He referred to the unwinding of positions that profit from small price differences between Treasuries and futures contracts.
The bond market selloff also saw participation from traditional asset managers, who were forced to sell Treasuries to raise cash amidst the broader market panic. Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments, noted that selling Treasuries was seen as a way to lock in liquidity and protect portfolios from further losses.
“The simplest explanation (for the move in yields) is investors selling what they can and hunkering down,” he said.
Reuters and the Financial Times contributed to this report.
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