Bond-market chaos is fueling concerns about a crisis. Here’s what you need to know.
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Chaos in the U.S. stock market has infected the bond market, fueling speculation about a potentially destabilizing shock to the global financial system.
The U.S. 10-year Treasury yield has climbed as much as 65 basis points over the last four trading days, briefly touching 4.509% overnight on Wednesday as President Trump’s widespread tariffs took effect. Yields haven’t risen this dramatically since October 2008, Dow Jones Market Data showed. The 10-year yield was at 4.50% as recently as February. Bond yields move inversely with prices, rising as prices fall.
The selloff in both stocks and bonds has been acute, pressuring liquidity in markets. “It’s not at a crisis stage,” said Robert Tipp, chief investment strategist at PGIM Fixed income, in a phone call Wednesday. But he said the jittery dynamics in markets were at risk of “spilling over” and overtaking Wall Street’s ability to keep liquidity flowing through when investors need it most.
The sudden yield moves have caused a popular gauge of bond-market volatility to spike. As of Tuesday, the ICE BAML MOVE Index had reached its highest level since October 2023, according to Dow Jones Market Data.
“This isn’t an issue confined to the Treasury market,” said Amar Reganti, a fixed-income strategist at Hartford Funds, explaining that “risk-free” Treasurys can have ripple effects through global bond and currency markets. “You get no rest in markets,” he said, when this kind of volatility hits Treasurys.
“This is not consistent with how the government securities market should trade.”
The tumult has also bled into the market for interest-rate swaps, causing the spread between 30-year Treasury yields and 30-year SOFR swap rates to fall dramatically.
Ralph Axel, a rates strategist at BofA Securities, said the drop earlier this week was one of the biggest on record, and further highlighted how investors appeared to be dumping bonds in favor of cash.
So far, the ructions in Treasurys haven’t been severe enough to threaten the orderly operation of one of the world’s most critical financial markets, said Subadra Rajappa, a fixed-income strategist at Societe Generale, during an interview with MarketWatch.
But the unrelenting selling pressure has alarmed bond-market professionals, who are bracing for the threat of more knock-on effects, including the possibility, still somewhat remote, that global credit markets could seize up. Some, including Tom Simons, an economist at Jefferies, have said that liquidity conditions are starting to resemble the last major Treasury market meltdown in the spring of 2020.
Even Treasury Secretary Scott Bessent has weighed in, urging investors to remain calm and insisting that there is “nothing systemic” about these latest moves.
“Typically the price action that you’re seeing here has the potential to lead to more disorderly trading,” Rajappa said. “But it’s too soon to come to that conclusion. For now, everything is still functioning and orderly.”
If things get really bad, the volatility in the bond market could spill over into the repo market, Rajappa noted.
Financial institutions use the repo market to meet their daily financing needs by pledging bonds as collateral for short-term loans. Typically, the borrower agrees to sell their bonds for a fixed term — frequently as brief as one day — before buying them back at a slight premium.
Financial institutions rely on the repo market to meet their daily financing needs. But if participants start hoarding cash, it could create a credit crunch, potentially forcing the Federal Reserve to step in and restart its bond-buying program.
“Speculation that the Fed will need to restart QE to support the long end of the curve has already begun to make the rounds,” said Ian Lyngen, a rates strategist at BMO Capital Markets, in written commentary shared with MarketWatch earlier.
Some have even warned that Trump’s tariffs could inspire a blowup in the Treasury market reminiscent of an incident in late 2022 that roiled the market for British government debt.
That episode stoked fears of contagion for the global financial system, and ultimately forced former British Prime Minister Liz Truss to resign.
But for now, the pain in bonds is simply compounding the losses from the selloff in stocks, as investors are realizing once again that they have few places to hide from the intensifying instability in markets.
Trump’s ‘Liz Truss Moment’
Truss’s problems began when her government pushed ahead with a budget plan that would have cut taxes while increasing spending. In the spasm that resulted, U.K. gilt yields soared as British pension funds were hit with margin calls on their leveraged bond positions. The Bank of England eventually intervened to buy long-dated gilts in order to contain the crisis.
Opinion: I was in London during the Liz Truss debacle. Here are 5 lessons for Trump — and the rest of us.
Dario Perkins, managing director, global macro at GlobalData TS Lombard, mentioned the possibility that the Treasury market could face a similar crisis as moves in bond markets have become “quite disorderly” over the past few days. This could create a troubling dilemma for the Federal Reserve.
“When yields rise too quickly, they become a threat to financial stability. But the central bank can’t totally abandon its worries about inflation, especially after four years of missing its target. It doesn’t want to cut rates, but it can’t sit on its hands while markets break,” Perkins said.
Perkins added that investors are increasingly seeing Trump’s insistence on huge tariffs as an indication of the administration’s recklessness when it comes to policy. That echoes criticisms that were levied at Truss and former U.K. Chancellor of the Exchequer Kwasi Kwarteng, he said.
Basis Trades Blowing Up
While the U.K. crisis was rooted in pension funds’ leveraged borrowing, in the U.S., concerns are growing that the unwind of a popular hedge-fund strategy could trigger a similarly destabilizing move.
Much of the blame for the rapid rise in Treasury yields over the past few days has been attributed to the blowup of a hedge-fund strategy known as the basis trade.
The strategy has grown to cover about $1 trillion in assets, according to Jefferies. Funds that use this strategy are known to employ a significant amount of leverage.
Hedge funds need to supercharge their bets to boost profits from what is essentially an arbitrage that exploits a narrow pricing gap between Treasury futures and the bonds themselves.
In a paper published in March by the Brookings Institution, a team of economists warned that if things in the bond market get bad enough, the Federal Reserve should be prepared to swoop in and take over basis traders’ positions.
Foreign Sellers Are A Big Risk
As selling in the Treasury market intensified, some wondered whether the spike in yields was a sign that foreign central banks might be dumping some U.S. debt.
Perhaps China could be liquidating some of its massive pile of Treasurys to heap more pressure on the White House?
So far, there is little evidence to support this, according to Jim Bianco, president of Bianco Research. The dollar initially strengthened against the Chinese yuan on Tuesday after the White House confirmed that the new tariffs would take effect after midnight Wednesday. If foreign holders were dumping Treasurys, one would expect the dollar to weaken.
But the buck had started to soften again early Wednesday, highlighting the notion that selling by foreigners — or even a buyer’s strike that sees them back away from the market — could be a big risk for the market, SocGen’s Rajappa said.
Watch Out For Tax Day
All of this is happening at a particularly inopportune time for the banking system. With tax day approaching, U.S. banks will likely soon face a major drain on their liquidity as depositors pull money to pay their tax bills.
“The major problem will be next week, with the individual income-tax payment deadline on April 15, which will put increasing pressure on the banks’ cash positions,” said Herman Sanne, who works in international equity sales at Jefferies, in commentary shared with MarketWatch.
According to Sanne, between $200 and $450 billion are expected to leave the financial system. Tax day has aggravated market volatility in the past, most recently in 2022 and 2024.
An auction of $58 billion in 3-year Treasury notes on Tuesday saw surprisingly weak demand, especially from foreign buyers. Some said it contributed to the latest leg higher in yields.
Two more auctions are set for this week: An auction of $39 billion in 10-year notes on Wednesday, and another for $22 billion in 30-year bonds on Thursday.
Investors will be keeping a close eye on both to see how Trump’s tariffs might be impacting foreign demand for American debt. Charlie McElligott, a cross-asset strategist at Nomura, said Wednesday’s 10-year auction would be the most important in recent memory. He said investors will be keeping a close eye on bids from direct buyers.
“Not hyperbole that this will be the most watched auction in years,” McElligott said. He noted that demand from direct bidders, seen as a proxy for foreign interest, will be particularly relevant.
Treasury Auctions In Focus
Story by Joseph Adinolfi, MSN
