Treasuries sank for a third straight day with long-end yields rising most amid growing cracks in the haven status of US government debt.
The sell-off was sharpest in notes and bonds maturing in 10 to 30 years, where losses are amplified when yields climb. The yield on 10-year notes rose 20 basis points in Asia trading Wednesday, while the 30-year’s was up 21 basis points to 4.97% — more than 60 basis points from last week’s lows.
The rise in longer-dated yields came alongside smaller gains in their shorter-term peers after a disappointing auction of three-year notes on Tuesday. Ten- and 30-year debt will be sold over the next two days.
“The failure of long-end US Treasuries to perform during times of stress is glaring,” wrote DBS Bank fixed income strategist Eugene Leow in a note to clients. “We suspect that a combination of market dislocation and investors keen to look for alternatives to Treasuries may be the key reasons why they have not been performing.”
The divergence in yields led to historic gaps between shorter- and longer-maturities. The 10-year exceeded the two-year by more than 70 basis points, while the 30-year traded more than a full percentage point higher than the two-year, for the first time since early 2022.
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Alongside the steepening of the curve, interest rate swaps have extended their recent extreme outperformance of Treasury securities as traders sought to avoid costs associated with holding bonds. Preference for swaps drove swap rates further below corresponding Treasury yields, with the spreads reaching the most inverted levels in years.
The moves continue a volatile week for bonds with Monday the wildest day for bond traders since the height of the pandemic in March 2020.
With little clarity on whether US President Donald Trump is willing to compromise on tariffs and how they will affect the US economy, a gauge of Treasuries’ implied volatility has soared to its most extreme level since October 2023. Currency fluctuations are the highest in two years, and the VIX index of equity volatility reached an eight-month high.
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Traders posited an array of reasons for Monday’s whiplash from technical positioning to tariff concerns to liquidations in favor of cash-like instruments.
“The pervasive uncertainty created by continuously changing US tariff threats and the scope of potential retaliatory measures remain a major blow to the global economy,” said Elias Haddad, senior markets strategist at Brown Brothers Harriman. “Bottom line: relief rallies in risk assets will likely be short-lived.”
The moves were reminiscent of when a highly leveraged hedge-fund wager — the basis trade, which exploits gaps between cash Treasury prices and futures — was unwound in 2020, rendering the bond market illiquid. Others more generally pointed to the possibility that money managers, including foreign investors, were selling en masse.
The episode required the US Federal Reserve to take emergency action to stabilize the market, and while this one is occurring at much higher yield levels that have rendered it less damaging, it has nonetheless stoked debate about whether it could lead to interest rate cuts sooner than has been anticipated based on the economy’s performance.
To Maya Bhandari, multi-asset strategies EMEA CIO at Neuberger Berman, the moves early in the week were a signal that bond markets may not be so orderly.
“If this bond rout has legs, that strengthens the case for the Fed to respond,” she said on Bloomberg Television. “But it’s got weaker growth and stickier inflation, so it’s not in an easy spot.”
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In addition to drawing a higher-than-anticipated yield, Tuesday’s $58 billion three-year note auction produced weak bidder-participation metrics.
As investors bid cautiously, primary dealers were awarded 20.7% of the notes, the biggest share in more than a year.
That bodes poorly for auctions of 10-year notes on Wednesday and 30-year bonds on Thursday, because longer-dated tenors experience bigger price changes when yields shift.
Already, the uncertainty tied to Trump’s policies has begun to push traders to find alternatives to Treasuries as havens, with bunds and Japanese debt looking more attractive to foreign buyers on a currency-hedged basis.
But a sale of Japanese 30-year government bonds drew weak investor interest this week and yields rose further on Wednesday.
The US bond sell-off “may be signalling a regime shift whereby US Treasuries are no longer the global fixed income safe haven in periods of risk-off”, Ben Wiltshire, G-10 rates trading desk strategist at Citi, wrote in an e-mailed note.
Markets are pricing in over 100 basis points of interest rate cuts in the US this year — equivalent to four quarter-point cuts, after pricing in as many as five cuts on Monday.
BlackRock warns the chance of a recession has increased if tariffs stay at this level, but that it’s unlikely the Fed will be able to cut rates aggressively given the likelihood trade policies will boost inflation.
“The effect of tariffs is stagflationary,” said Wei Li, global chief investment strategist at BlackRock on Bloomberg TV. “The Fed is not going to be able to come to the rescue of the economy as readily as they were able to before.”
Charts: Bloomberg
