APRIL 10, 2025
A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., April 9, 2025. – REUTERS/Brendan McDermid
LONDON, UNITED KINGDOM – U.S. President Donald Trump’s decision to pause the hefty duties he had said he would impose on dozens of countries one week ago followed turmoil in financial markets that included an acute selloff in the $29 trillion Treasury market.
Trump said on Wednesday the bond market had recovered well after investors became queasy about it in reaction to his tariff announcements.
“The bond market now is beautiful,” he told reporters.
The selloff is the latest sign of the power of government bond markets to act as a restraint on policymakers, while talk of a return of so-called bond vigilantes has risen in recent years.
WHAT HAPPENED IN BOND MARKETS THIS WEEK?
In short, the U.S. Treasury market — a central pillar of the global financial system — came under heavy selling pressure, sending 10-year borrowing costs surging.
At one-point, 10-year bond yields were set for their biggest weekly jump in more than a decade. Bond yields move inversely to the price. Trading at 4.27% on Thursday, those yields are comfortably below Wednesday’s peak of 4.51%. They are also well below the high of almost 5% hit in late 2023 and the double-digit levels seen in the 1980s.
Notably, this jump was a sharp reversal of the initial fall seen after Trump’s sweeping tariff announcement last week that raised U.S. recession risks and expectations for rate cuts.
WHY DO WE CARE?
Because the Treasury market is crucial to financial market stability at home and abroad.
A government can raise revenue to fund spending through income such as tax receipts or borrow money on the bond markets.
Not only does it face higher borrowing costs it there’s a bond selloff but those increases filter across to mortgages and corporate loans, spreading out the economic damage.
The 30-year mortgage rate for instance is benchmarked to 10-year Treasuries, which surged by more than 20 bps at one point on Wednesday – before the tariff pause brought calm.
Yields on U.S. corporate bonds, which are priced off of U.S. Treasuries, have shot up. Yields on U.S. junk bonds closed Wednesday nearly a percentage point higher than a week ago at 8.38%, an ICE BofA index shows
Higher Treasury yields also pushed up borrowing costs across the globe, a headache for countries such as Britain or France that are already grappling with high amounts of debt.
Heavily indebted Japan’s 30-year bond yield this week surged to 21-year highs, and Britain’s 30-year bond yields hit their highest since 1998. Both were below those peaks on Thursday.
HOW BAD WAS THE STRESS?
The speed and the scale of the selloff in Treasuries meant signs of dislocation emerged as hedge funds unwound some debt-fuelled bets.
While market participants, who include brokers, traders and investors, said the selloff was orderly, indicators such as bid-ask spreads — or the difference between buyers’ and sellers’ price offers — widened on Wednesday before Trump’s announcement. One trading desk said the bid-ask spread was double its normal levels.
Investors and analysts likened this week’s moves to the frantic “dash-for-cash” of March 2020, when a crash in the Treasury market forced the Federal Reserve to step in with a massive $1.6 trillion bond-buying rescue.
The scale of the selloff, highlighting vulnerabilities in a key market, also drew parallels with Britain’s 2022 mini-budget crisis that sparked a UK bond rout.
DID HEDGE FUNDS CAUSE THE SELLING?
One explanation for the sharp selloff was that a rapid unwinding of so-called basis trades was exacerbating the selling.
Basis trades, typically the domain of macro hedge funds, rely on selling futures contracts or paying swaps and buying cash Treasuries with borrowed money, with a view to exploiting slight price differences.
If a prime brokerage, which lends money to hedge funds, asks for their money back that can lead to an unwinding of the basis trade.
There was also some concern that China could offload U.S. Treasuries, something that would take time to show up in official numbers. China is the second-biggest foreign holder of U.S. government debt after Japan, holding almost $761 billion of bonds in January.
WHERE DO THE BOND VIGILANTES COME INTO IT?
The term bond vigilantes, coined in the 1980s, refers to debt investors who seek to impose fiscal discipline on governments they perceive as profligate by raising their borrowing costs.
In the context of this week, the term is also being used to describe the bond market selloff as a sign of investors expressing concern about the consequences of erratic policymaking.
“The Bond Vigilantes have struck again,” Yardeni Research said in a note, adding that they were the only players with a 100% success rate in U.S. markets. “As far as we can tell, at least with respect to U.S. financial markets, they are the only 1.000 hitters in history.”
Courtesy/Source: Reuters
