SINGAPORE (Reuters) -U.S. Treasuries extended heavy losses on Wednesday in a sign investors are dumping even their safest assets as a global market rout unleashed by U.S. tariffs took another twist.
Warning signals had been flashing for a few days as spreads between Treasury yields and swap rates in the interbank market collapsed under a weight of bond selling.
Hedge funds were at the heart of it because their lenders could no longer stomach the ‘basis trade’ – large positions betting on small differences between cash Treasuries and futures prices as markets started to swing on tariff headlines.
Here are some comments from analysts and investors:
MARK ELWORTHY, HEAD OF FIXED INCOME, CURRENCIES AND COMMODITIES TRADING, BANK OF AMERICA, AUSTRALIA
“This is up there with GFC and COVID level of volatility. Would expect to have some central bank response in the near term if markets continue to behave like they have been in the last 12-24 hours.”
“The move in the US 10y over the last day could also be the market starting to focus more on inflation side of equation rather than just growth. There may be also market functioning reasons … and the use of basis trades by hedge funds which may be unwinding.”
“So far the US administration has not been concerned with the market sell-off, and in the past referred to the 10 year yield as its preferred barometer. However, if there is risk to financial stability in the US from the currency policy action, then the administration may have to pay more attention or face the risk of living through their own Liz Truss moment.”
“These kind of things become problematic if the prime broker starts saying that now, because of the volatility in the underlying Treasury curve, I want to charge you higher margin or I basically want more margins from you for holding the positions for you.
“Those (hedge funds), if they’re not able to fork up the cash or the margins, then they have to unwind those positions … so that’s what happening at the moment. You can see that there’s a huge move in 10-year Treasuries for the last two, three days. It was rallying initially because obviously it was a risk off kind of thing, but now it’s going the other way around because people are looking for cash.
“I don’t see who are the buyers in the Treasury markets at the moment, because even the foreign central banks are not buying it so then obviously it creates a problem in the cash market, in terms of liquidity, in terms of price, in terms of clearing such a huge volume, everything is a issue.”
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