Treasury yields surge as tariffs spark bond selloff and inflation concerns

US Bond Market Under Pressure

Tariffs Trigger Selloff in Treasuries

The US bond market is facing significant pressure following the Trump administration’s tariffs, which have triggered a sharp selloff in Treasuries. The 10-year yield has risen to around 4.47%, while the 30-year yield has neared 5%, reflecting a significant shift from the more stable levels seen earlier this year.

Hedge Funds’ Forced Unwinding of Basis Trades

A major factor behind the spike is hedge funds’ forced unwinding of basis trades. These leveraged trades, which exploit price differences between Treasury futures and cash bonds, have come under stress amid rising volatility and margin calls, accelerating the selloff.

Inflation Concerns Reignited

The tariffs have also reignited inflation concerns. Higher import costs are expected to drive up consumer prices, prompting investors to demand higher yields to offset the anticipated erosion of purchasing power. This has complicated the Fed’s policy outlook, which now must address inflation risk while avoiding a deeper economic slowdown.

Concerns Over Foreign Holders of US Debt

Adding to the pressure are concerns that foreign holders of US debt—particularly China—may cut back on Treasury purchases in response to the tariffs, weakening demand and pushing yields even higher.

Market Sensitivity to Policy Shocks

The yield surge highlights the market’s sensitivity to policy shocks and leverage-driven flows. It also shows the broader economic risks of aggressive trade actions in a fragile macro environment.

Conclusion

The US bond market is under significant pressure following the tariffs, with the 10-year yield rising to around 4.47% and the 30-year yield nearing 5%. The forced unwinding of basis trades and inflation concerns have contributed to the selloff, while foreign holders of US debt may also be affected. The market’s sensitivity to policy shocks and leverage-driven flows underscores the need for careful consideration of trade policy and its potential impacts on the economy.

FAQs

Q: What is the current 10-year Treasury yield?

A: The current 10-year Treasury yield is around 4.47%.

Q: What is the current 30-year Treasury yield?

A: The current 30-year Treasury yield is nearing 5%.

Q: What are basis trades?

A: Basis trades are leveraged trades that exploit price differences between Treasury futures and cash bonds.

Q: Why are hedge funds forced to unwind their basis trades?

A: Hedge funds are forced to unwind their basis trades amid rising volatility and margin calls, which has accelerated the selloff in Treasuries.

Q: How may the tariffs affect foreign holders of US debt?

A: The tariffs may cause foreign holders of US debt, particularly China, to cut back on Treasury purchases, weakening demand and pushing yields even higher.