SINGAPORE (Reuters) -U.S. Treasuries extended heavy losses on Wednesday in a sign investors are dumping even their safest assets as a global market rout unleashed by U.S. tariffs took another twist.
Warning signals had been flashing for a few days as spreads between Treasury yields and swap rates in the interbank market collapsed under a weight of bond selling.
Hedge funds were at the heart of it because their lenders could no longer stomach the ‘basis trade’ – large positions betting on small differences between cash Treasuries and futures prices as markets started to swing on tariff headlines.
Here are some comments from analysts and investors:
MARK ELWORTHY, HEAD OF FIXED INCOME, CURRENCIES AND COMMODITIES TRADING, BANK OF AMERICA, AUSTRALIA
“This is up there with GFC and COVID level of volatility. Would expect to have some central bank response in the near term if markets continue to behave like they have been in the last 12-24 hours.”
KERRY CRAIG, GLOBAL MARKET STRATEGIST, J.P. MORGAN ASSET MANAGEMENT, MELBOURNE
“The move in the US 10y over the last day could also be the market starting to focus more on inflation side of equation rather than just growth. There may be also market functioning reasons … and the use of basis trades by hedge funds which may be unwinding.”
“So far the US administration has not been concerned with the market sell-off, and in the past referred to the 10 year yield as its preferred barometer. However, if there is risk to financial stability in the US from the currency policy action, then the administration may have to pay more attention or face the risk of living through their own Liz Truss moment.”
MUKESH DAVE, CHIEF INVESTMENT OFFICER, ARAVALI ASSET MANAGEMENT, SINGAPORE
“These kind of things become problematic if the prime broker starts saying that now, because of the volatility in the underlying Treasury curve, I want to charge you higher margin or I basically want more margins from you for holding the positions for you.
“Those (hedge funds), if they’re not able to fork up the cash or the margins, then they have to unwind those positions … so that’s what happening at the moment. You can see that there’s a huge move in 10-year Treasuries for the last two, three days. It was rallying initially because obviously it was a risk off kind of thing, but now it’s going the other way around because people are looking for cash.
“I don’t see who are the buyers in the Treasury markets at the moment, because even the foreign central banks are not buying it so then obviously it creates a problem in the cash market, in terms of liquidity, in terms of price, in terms of clearing such a huge volume, everything is a issue.”
GRACE TAM, CHIEF INVESTMENT ADVISOR, BNP PARIBAS WEALTH MANAGEMENT, HONG KONG
“Markets are now concerned about China and other countries to ‘dump’ US treasuries as a retaliation tool. Hence, UST yields up. There has been some spillover to global yields including Japan, which are all up. In the short term, we expect the bond market to remain volatile given the uncertainty over tariffs, potential negotiations, and potential retaliations. Market has been highly sensitive to any progress on tariffs and negotiations. That said, weaker economic data from the US could drive yields down again on worries over rising recession risk.”
JACK CHAMBERS, SENIOR RATES STRATEGIST, ANZ, SYDNEY
“This is beyond fundamentals right now. This is about liquidity. There was, earlier this year, especially in dollar swap spreads, a lot of positioning to be paid swap spreads, on expectations that treasuries outperform swaps.
“Obviously that’s all unwound, and then some. Swap spreads have fallen a very long way in a very disorderly way.”
“It’s relatively esoteric…but as with the plumbing, the plumbing only matters when it’s the only thing that matters.”
DANIEL TAN, PORTFOLIO MANAGER, GRASSHOPPER ASSET MANAGEMENT, SINGAPORE
“The huge moves in USTs come as Trump’s sweeping tariffs take effect, including 104% China level. To force Trump to deal, China may implement these : 1) increase its new 34% tariffs on U.S. exports again 2) curb China’s exports of rare earths 3) weaken the yuan as occurred during Trump’s 2018 trade war 4) sell down its holding of about $760 billion of U.S. Treasuries.
“Add to this, the recent Treasury auction met with weak demand amid fiscal risk and foreign dumping in retaliation to tariffs. Policy-sensitive two year-note is outperforming the rest of the U.S. Treasury curve amid speculation that Fed has to act ahead of a possible U.S. recession despite sticky inflation. Two cuts are priced in for June and July FOMC meetings and four cuts for the rest of this year.”
VASU MENON, MANAGING DIRECTOR, INVESTMENT STRATEGY, OCBC, SINGAPORE
“Tariffs are inflationary and the likely inflationary impact offers some justification for the curve steepening that’s hitting Treasuries and causing yields at the long end to rise sharply. Treasuries had a strong rally as yields fells sharply in recent months and we are seeing some profit taking by global money managers to cover the sharp losses in equities.
“Some market observers think that the latest moves in U.S. Treasury markets are reminiscent of 2020 when a highly leveraged hedge-fund wager – the basis trade, which exploits gaps between cash Treasury prices and futures – was unwound which rendered the bond markets illiquid.”
(Reporting by Rae Wee, Tom Westbrook and Ankur Banerjee in Singapore, Scott Murdoch in Sydney: Editor Neil Fullick)
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