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US government debt sold off sharply on Monday as hedge funds cut back on risk in their strategies and investors continued shifting into cash during a third day of acute tumult on Wall Street.
The benchmark 10-year Treasury yield jumped 0.19 percentage points on Monday to 4.18 per cent, the biggest daily rise since September 2022, according to Bloomberg data. The 30-year yield jumped 0.21 percentage points, the biggest move since March 2020. Yields rise when prices fall.
Monday’s drop in Treasuries — ultra-low-risk assets that typically shine during periods of market turbulence — highlights how US President Donald Trump’s announcement last Wednesday of steep tariffs against trading partners continues to reverberate across Wall Street. Equities fell sharply on Thursday and Friday, shedding $5tn of market value, but investors had initially sought refuge in Treasuries.
Market participants said the declines in the $29tn Treasury market on Monday reflected several factors, including hedge funds cutting down on leverage — or borrowing used to magnify trades — and a broader dash for cash as investors sheltered from swings in the wider market.
Gennadiy Goldberg at TD Securities said the move reflected “an ‘everything, everywhere all at once’-type trade”. He added: “Multisector funds are trying to deleverage, which leads to a ‘sell everything’ trade.”
Investors and analysts pointed in particular to hedge funds that took advantage of small differences in the price of Treasuries and associated futures contracts, known as the “basis trade”. These funds, which are large players in the fixed-income market, unwound those positions as they cut back on risk, prompting selling in Treasuries.
“Hedge funds have been liquidating US Treasury basis trades furiously,” said one hedge fund manager.
The moves were not limited to hedge funds. Investors across the board sold Treasuries to raise cash, with one fixed-income trader pointing specifically to traditional asset managers.
“I think investors are moving to cash and cash-adjacent assets to weather this market volatility,” said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.
“The simplest explanation (for the move in yields) is investors selling what they can and hunkering down. Selling equities now will lock in losses so the lowest-hanging fruit is to raise cash by selling Treasuries,” said Al-Hussainy.
The hedge fund manager who attributed the moves in yields to the basis trade said the scale of the broader hedge fund selling was “destroying” liquidity — or the ability to easily buy and sell assets — across Treasuries, high-grade corporate bonds and mortgage-backed securities.
“There’s massive deleveraging going on, any source of liquidity is being tapped,” the person said.
Additional reporting by Costas Mourselas and Leslie Hook
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