US bond plunge sends global alarm bells
SINGAPORE/LONDON (Reuters) - Global financial markets were rocked by a sudden sell-off in US Treasuries, the backbone of the international financial system, on Wednesday as investors fled assets seen as the safest of all, amid growing uncertainty over tough US tariff policies.
Even the US dollar, a traditional safe haven in times of uncertainty, weakened against other major currencies, reflecting a shake-up in confidence in the health of the US economy.
The yield on the benchmark 10-year Treasury note has surged 44 basis points in just one week, to 4.44%, and if the trend continues, it will be the biggest one-week increase since 2001.
With a size of about $29 trillion, the US bond market's plunge is causing global borrowing costs to skyrocket, putting more pressure on central banks and policymakers, especially in the context of major economies struggling to face the risk of recession as the US imposes the highest tariffs in more than a century.
International response: Japan speaks out
In the face of this serious development, Japan said it will cooperate closely with the G7 group and the International Monetary Fund (IMF) to find solutions to stabilize the market.
In the domestic market, the yield on the 30-year Japanese government bond has hit a 21-year high. Similarly, the UK 30-year bond rose to levels not seen since 1998, while the German 10-year bond held steady, reflecting the uneven impact.
At the New York market open, selling pressure on US Treasuries continued to mount, with the 10-year yield jumping 20 basis points in a single day.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said: “There is a technical unwinding in the US bond market, but the fundamental risks remain. I am not sure the Fed can handle this situation with traditional intervention alone.
Hedge Funds’ Long-Term Bond Selling Pressure
The 30-year US Treasury yield rose 20 basis points to 4.92%. The three-day rally totaled 53 basis points, the fastest three-day gain since 1982.
The selloff focused on long-term bonds, causing the spread between 2-year and 10-year yields – a key indicator of the economic outlook – to widen sharply, reaching its highest level since 2022.
“You only have to look at the yield curve overnight to see how unusual it is – the 2s-10s spread widened by 30 basis points in a matter of hours. I’ve never seen that in my career,” said Jamie Niven, fixed income portfolio manager at Candriam.
Systemic Risk Warning
The Japanese government and central bank quickly convened an emergency meeting to assess the situation, in an effort to prevent the risk of a wider sell-off.
Rising borrowing costs are not just affecting governments, but also trickling down to the private sector – including businesses and households – as corporate loans and mortgages become more expensive.
Some experts believe the US Federal Reserve (Fed) may be forced to cut interest rates sooner than expected or introduce liquidity support packages similar to those seen during the COVID-19 crisis or the global financial crisis.
“If markets continue to behave as they have in the last 12-24 hours, central banks will certainly have to respond in the near term,” said Mark Elworthy, head of trading at Bank of America in Australia.
At the same time, global trade flows are shifting, reducing foreign demand for US Treasury bonds. Weak demand in the $58 billion auction of three-year notes has raised concerns about the waning appeal of the next two auctions – $39 billion of 10-year notes and $22 billion of 30-year notes due on Thursday.
Geopolitical risks and capital flow reversals
Meanwhile, geopolitical risks are also starting to have an impact. “The market is concerned that China and some other countries could use their sales of U.S. Treasuries as a retaliatory lever in trade tensions,” warned Grace Tam, chief investment adviser at BNP Paribas Wealth Management (Hong Kong).
Another notable sign is the “structural breakdown” of basis trading – a strategy often used by hedge funds in which they buy Treasuries on leverage and sell futures contracts to profit from the difference in prices.