The bond market plunges as crisis brews
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The price of U.S. Treasury bonds is plunging, in what Treasury Secretary Scott Bessent on Wednesday called "deleveraging convulsions." The effect is to raise borrowing costs just as recession fears spike.
Why it matters: The last thing America needed amid a global trade war and a stock market meltdown was a debt crisis, too. But that now seems to be a real possibility.
What they're saying: "This is the script for a truly existential financial crisis," writes Columbia economic historian Adam Tooze, who wrote a whole book on the very similar dynamics that overtook the Treasury market in March 2020.
Driving the news: Bond yields — which move in the opposite direction to prices — are soaring in the wake of protectionist U.S. tariffs.
- The amount that the U.S. government needs to pay to borrow money for a decade rose briefly to more than 4.5% Wednesday morning. For a 30-year bond, the yield rose to more than 5%.
- Those moves are truly enormous by bond market standards. As recently as Friday, the 10-year yield was less than 4%, and the 30-year was below 4.4%.
The intrigue: In normal times, the most consistent buyer of Treasury bonds is a group of hedge funds that participate in something called the "basis trade."
- They buy the bonds in order to hedge their derivatives exposure to institutional investors, who can lock in slightly higher yields in the futures market.
- The profit on any given trade is minuscule, but it's also very close to risk-free, so the hedge funds can apply as much as 50x or even 100x leverage.
- By many accounts, the basis trade is now unwinding, which means the hedge funds are selling their bonds — or, at the very least, not buying new ones.
The big picture: In a move reminiscent of the bond-market tantrum that swept U.K. Prime Minister Liz Truss from office in 2022, the technical factors in the bond market were precipitated by — and also exacerbated — fundamental issues with the country's finances.
- As ING analysts wrote on Tuesday, the "sell America" trade is currently dominating the market, and is applying equally to both bonds and stocks.
- Many global institutional investors are overweight U.S. assets, which have historically benefited from the dollar's status as a reserve currency and safe haven, as well as many decades of market outperformance.
- "Portfolio flows are much bigger than trade flows," noted David Rolley, a fund manager at Loomis Sayles. If international investors decide to pull out of U.S. assets, that will hit bonds and the dollar alike.
The bottom line: As analyst Jim Bianco wrote on X, "Markets are fragile. Tariffs broke the bond market."
