Who is torching the Treasury bond market? (1 Viewer)

[Ahlevah]

That was the question I’ve been asking myself all week: who was dumping all of these bonds, forcing Trump to walk back his reciprocal tariffs after he said that was it, he was rolling them out, and why?

It looks like we may have our answer: hedge funds doing what they always do, which is use a lot of leverage enabled by banks to make big arbitrage bets on small differences between asset prices. In this case it was both trades involving small price differentials between Treasury futures and the underlying cash value of the securities, and a newer trade involving the Secured Overnight Finance Rate (SOFR). The article I linked does a good job explaining the mechanics of how these trades work, so I’ll emphasize the punchline. Trump and his tariff plans thew a monkey wrench into their idea of how to make a lot of money, because the spreads between the derivative contracts they sold and the actual cash prices of the bonds they bought didn’t do what they thought they would based on what Trump was supposed to have done:

"Since the beginning of all this tariff talk, there's been a massive tightening of the SOFR swaps spread," said Matthew Scott, head of core fixed-income and multiasset trading at AllianceBernstein. "There's been a trend of investors selling cash bonds to reduce risk, and fear of foreign buyers pausing purchases amid tariff uncertainty."

Things came to a head earlier this week as conditions deteriorated dramatically. The chart below shows the 30-year SOFR swap spread collapsing overnight on Tuesday.

What had been called "the trade of the year" was suddenly hit by extreme volatility, said Brij Khurana, a fixed-income portfolio manager at Wellington Management.

https://www.morningstar.com/news/marketwatch/20250412232/how-the-trade-of-the-year-in-the-bond-market-became-a-nightmare-for-investors-after-trumps-tariffs

So what happens now? Are these idiots done unwinding these trades yet? I don’t know, but if people (Who the **** knows? China? Japan? Fred and Martha?) keep selling these bonds, threatening to do the unthinkable—freeze the market for U.S. debt—what would the Fed do? Probably start buying them, or get banks to buy them with a promised backstop, say, by not forcing them to mark them to market. Whatever, I never thought Treasury bonds would be anything other than boring. Fooled me.

 

[Callen]

That was the question I’ve been asking what happens now? Are these idiots done unwinding these trades yet? I don’t know, but if people (Who the **** knows? China? Japan? Fred and Martha?) keep selling these bonds, threatening to do the unthinkable—freeze the market for U.S. debt—what would the Fed do? Probably start buying them, or get banks to buy them with a promised backstop, say, by not forcing them to mark them to market. Whatever, I never thought Treasury bonds would be anything other than boring. Fooled me.

Maybe give Carney a call.....

 

[j brown's body]

That was the question I’ve been asking myself all week: who was dumping all of these bonds, forcing Trump to walk back his reciprocal tariffs after he said that was it, he was rolling them out, and why?

It looks like we may have our answer: hedge funds doing what they always do, which is use a lot of leverage enabled by banks to make big arbitrage bets on small differences between asset prices. In this case it was both trades involving small price differentials between Treasury futures and the underlying cash value of the securities, and a newer trade involving the Secured Overnight Finance Rate (SOFR). The article I linked does a good job explaining the mechanics of how these trades work, so I’ll emphasize the punchline. Trump and his tariff plans thew a monkey wrench into their idea of how to make a lot of money, because the spreads between the derivative contracts they sold and the actual cash prices of the bonds they bought didn’t do what they thought they would based on what Trump was supposed to have done:

https://www.morningstar.com/news/marketwatch/20250412232/how-the-trade-of-the-year-in-the-bond-market-became-a-nightmare-for-investors-after-trumps-tariffs

So what happens now? Are these idiots done unwinding these trades yet? I don’t know, but if people (Who the **** knows? China? Japan? Fred and Martha?) keep selling these bonds, threatening to do the unthinkable—freeze the market for U.S. debt—what would the Fed do? Probably start buying them, or get banks to buy them with a promised backstop, say, by not forcing them to mark them to market. Whatever, I never thought Treasury bonds would be anything other than boring. Fooled me.

Is this an example of chaotic leadership leading to marker volatility?

 

[Ahlevah]

Maybe give Carney a call.....

Well, if he happens to have at least a spare trillion lying around that he wants to invest in the world’s largest potential deadbeat, sure, why not?

 

[Callen]

Well, if he happens to have at least a spare trillion lying around that he wants to invest in the world’s largest potential deadbeat, sure, why not?

I meant call for a informed, smart, experienced economic advice

 

[SNOWFLAKE]

Who is torching the Treasury bond market?​

Globalists
Liberal Elites
DEI hires
The Biden Crime Family
Transgenders
Ukrainian gangsters
Iranians
BLM
School teachers

The list is endless.

 

[dmpi]

The guy dumping the bond has two attributes:
1) They hold a boatload of US goverment bonds
2) They need money (dollars) .... fast.

In my book it's 100% China. They hold a boatload of bonds and they have to generate US dollars to keep their own currency from free falling by buying it up for dollars. From the volume of bonds it can only be them.

 

[Ahlevah]

Is this an example of chaotic leadership leading to marker volatility?

I don’t know, but I intend to do more reading this week on so-called “basis trades.” They have the potential to be something people hear about on the nightly news, especially if we end up having another banking or financial crisis because of them. These Wall Street speculators and their enabling financiers never seem to learn:

Basis traders support Treasury market functioning by keeping the prices of Treasury futures near their fair value relative to Treasury securities and by serving as an important source of demand for Treasury securities, including during the 2017-2019 period of quantitative tightening when basis traders absorbed much of the increased Treasury supply. However, the basis trade is typically highly leveraged, which can increase Treasury market fragility. Research has found that the rapid unwinding of basis trades by hedge funds contributed to the Treasury market stress in March 2020.

Quantifying Treasury Cash-Futures Basis Trades

The Federal Reserve Board of Governors in Washington DC.

www.federalreserve.gov

What is the actual exposure? Don’t know. But I can’t recall seeing prices for long-dated Treasuries fall this far this fast. They’re acting like stocks. Fred and Martha are probably getting worried, because it’s affecting their other bonds as well: municipals, corporates, agencies, levered funds…. I can’t say I’m not concerned as a retiree, because I do own bonds. Fortunately, I also have a lot of liquidity in the form of short-dated Treasuries and T-bills, so if there is a panic I would look at it as buying opportunity. Fred and Martha, on the other hand, would be lucky if only their hair caught on fire.

 

[maxparrish]

Per early reports it was Japan followed by China.

 

[Ahlevah]

Not only no, but **** no:

A research paper to be presented at the Brookings Papers on Economic Activity (BPEA) conference on 28 March, argues that central banks, particularly the Federal Reserve, should implement targeted interventions in the US Treasury market by backstopping hedge funds involved in the basis trade during periods of extreme market stress.​

Central Banks should backstop hedge funds arbitraging the basis trade, new Brookings Paper suggests

A research paper to be presented at the Brookings Papers on Economic Activity (BPEA) conference on 28 March, argues that central banks, particularly the Federal Reserve, should implement targeted interventions

www.fi-desk.com

 

[Ahlevah]

Per early reports it was Japan followed by China.

Buying in the SOFR market (presumably from short covering) juxtaposed against the massive selling in the 30-year Treasury was what threatened a liquidity crisis in that market last Tuesday. That sort of disorderly, forced liquidation had hedge fund fingerprints all over it. But we’re certainly not giving these countries any incentive to buy these bonds and every reason to sell. Their selling was probably a factor in forcing the hand of hedge funds on these trades.

 

[Gimmesometruth]

The golden age includes making US bonds unattractive and the US $ a bit less of the reserve currency. I get the admin wanting a weaker $, but was this all necessary?

 

[Ahlevah]

The guy dumping the bond has two attributes:
1) They hold a boatload of US goverment bonds
2) They need money (dollars) .... fast.

In my book it's 100% China. They hold a boatload of bonds and they have to generate US dollars to keep their own currency from free falling by buying it up for dollars. From the volume of bonds it can only be them.

Never underestimate the ability of a hedge fund manager to leverage a lot of money into a huge pile of debt controlling a gargantuan mountain of assets, all in the name of greed.

 

[Ahlevah]

The golden age includes making US bonds unattractive and the US $ a bit less of the reserve currency. I get the admin wanting a weaker $, but was this all necessary?

Imploding the bond market? Probably not. This is probably not over, either. The market sentiment on long-dated Treasuries wasn’t that great to begin with, but imagine you’re a bank, insurance company, or pension fund sitting on all of this melting debt now with all of this derivative exposure. What would you do?

 

[Gimmesometruth]

What would you do?

Prepare impeachment filings

 

[Ahlevah]

Prepare impeachment filings

No, my man. You’d reduce your long-bond exposure—reduce risk. That means higher rates, and a higher cost of financing our government—unless the Federal Reserve intervenes with some sort of bond-buying plan, like QE.

 

[CaughtInThe]

More importantly, why didn't the Trump administration anticipate this? Where are their experts? What's next?

 

[OrphanSlug]

That was the question I’ve been asking myself all week: who was dumping all of these bonds, forcing Trump to walk back his reciprocal tariffs after he said that was it, he was rolling them out, and why?

To be honest, I was a bit wrong on this subject. But the answer is everyone is selling them off. Namely Japan, China, and various EU nations. China I thought would hold the debt as a wedge tool, but nope.

We were able to predict private investment holding of US treasuries would get dumped, and they were the first to act globally triggering this response. But Japan and China jumped in on the selloff the moment Trump decided to target them further.

You could say it was retaliatory, as the punishment is valuation of US debt as a "safe haven" investment.

 

[Ahlevah]

More importantly, why didn't the Trump administration anticipate this? Where are their experts? What's next?

Good question. Scott Bessent is a Wall Street veteran and professor of economic history. If anyone should have anticipated this, it’s him. But would Trump even listen to his advice?

What could be next is another financial crisis, with Fed hedge fund bailouts. What concerns me is all of this negativity about long-dated Treasuries could turn into a self-fulfilling prophecy. Few people are advocating buying them. Some of them, in fact, are saying they’ve become “too risky,” as in downright toxic.

Personally, I think the real threat with so much debt is deflation, not inflation. Where is this money going to come from when trillions of dollars are disappearing from all manner of assets and Joe Sixpack can’t afford a bag of hamburger?

 

[RedFishBlueFish]

Good question. Scott Bessent is a Wall Street veteran and professor of economic history. If anyone should have anticipated this, it’s him. But would Trump even listen to his advice?

What could be next is another financial crisis, with Fed hedge fund bailouts. What concerns me is all of this negativity about long-dated Treasuries could turn into a self-fulfilling prophecy. Few people are advocating buying them. Some of them, in fact, are saying they’ve become “too risky,” as in downright toxic.

Personally, I think the real threat with so much debt is deflation, not inflation. Where is this money going to come from when trillions of dollars are disappearing from all manner of assets and Joe Sixpack can’t afford a bag of hamburger?

Bessent is an enigma to me. He is a well-spoken, intelligent, level-headed person. Why has he thrown his lot in with the King of Chaos?

I saw Scaramucci on CNBC weeks ago. He now claims to be embarrassed about his participation in Trump's first term (albeit short). He said he got caught up in the power of the presidency and lost his perspective. Maybe Bessent has too.

@Ahlevah, please excuse my off-course thoughts here.

On subject, Barron's had this to say, "Trump and his advisers may not appreciate that the U.S. is a debtor nation and needs to attract foreign capital to fund its massive budget deficits. The Trump trade wars may be alienating the very buyers the country needs." link And here's what Mark Fabian had to say in an USA Today article "
The bond sell-off “really could be about default risk,” said Matt Fabian, a partner with Municipal Market Analytics, a bond market research firm. “This might be saying something about the U.S. government’s ability to function. There’s every reason to be concerned about the government as a going concern.”
Even if officials don’t outright refuse to honor U.S. government obligations, the chance of some sort of technical blunder has increased dramatically because of the “gutting” of workers and processes in Washington, Fabian pointed out. link And one more from CNBC, "It’s about what’s coming next, and that’s tariff driven inflation. And that has changed the dynamic within the bond market,” Jim Bianco, president of Bianco Research, said Friday on “Money Movers.” “And all this talk about leverage unwinds and bank selling and whether or not the Chinese are selling and all that other stuff, that’s just an accelerant on the bigger move here.” link

 

[CaughtInThe]

Good question. Scott Bessent is a Wall Street veteran and professor of economic history. If anyone should have anticipated this, it’s him. But would Trump even listen to his advice?

What could be next is another financial crisis, with Fed hedge fund bailouts. What concerns me is all of this negativity about long-dated Treasuries could turn into a self-fulfilling prophecy. Few people are advocating buying them. Some of them, in fact, are saying they’ve become “too risky,” as in downright toxic.

Personally, I think the real threat with so much debt is deflation, not inflation. Where is this money going to come from when trillions of dollars are disappearing from all manner of assets and Joe Sixpack can’t afford a bag of hamburger?

The bigger problem is we elected a mob boss who doesn't know economics (or care to learn) and is trying to turn our country into Patrimonialism.

Which then means that any horrible thing can happen because a bunch of stuff can't be predicted (as Patrimonialism is implemented) because we just don't have experience with it.

 

[Callen]

Bessent is an enigma to me. He is a well-spoken, intelligent, level-headed person. Why has he thrown his lot in with the King of Chaos?

I think it may be interesting who resigns in the next few weeks....to spend more time with their families.

 

[Helix]

We all know who is torching the economy. Some of us know why.

 

[Ahlevah]

To be honest, I was a bit wrong on this subject. But the answer is everyone is selling them off. Namely Japan, China, and various EU nations. China I thought would hold the debt as a wedge tool, but nope.

We were able to predict private investment holding of US treasuries would get dumped, and they were the first to act globally triggering this response. But Japan and China jumped in on the selloff the moment Trump decided to target them further.

You could say it was retaliatory, as the punishment is valuation of US debt as a "safe haven" investment.

There are so many moving parts to all of this that gaming it is next to impossible:

Inflation: tariffs; limited goods as exporters shift to other markets; excessive federal spending and debt, leading to QE; gold the canary in the coal mine

Deflation/disinflation: Federal Reserve QT, contraction in M2 money stock; asset-price deflation; commodity-price deflation (with few exceptions, like gold); recession fears

So at times like this, with so much uncertainty, the natural response is to reduce risk and raise liquidity, and that’s exactly what people seem to be doing. Treasury Secretary Scott Bessent wants to sell more longer-dated Treasuries in order to provide more certainty and stability in planning the budget, but with so much debt now the cost starts to assert itself. So the idea may be to get domestic banks to buy more if it. That would stabilize the debt situation, but it would also reduce the availability of capital into the private market. SO that could eventually force the Federal Reserve to start another round of QE at some point.

 

[Ahlevah]

Bessent is an enigma to me. He is a well-spoken, intelligent, level-headed person. Why has he thrown his lot in with the King of Chaos?

Same thought entered my mind.

I saw Scaramucci on CNBC weeks ago. He now claims to be embarrassed about his participation in Trump's first term (albeit short). He said he got caught up in the power of the presidency and lost his perspective. Maybe Bessent has too.

I long ago gave up trying to understand what motivates people to do certain things, but where you can remove the fog you begin to understand that most people, whether they’re idealists, pragmatists, opportunists, or completely self-serving sociopaths, are largely rational human beings. I’ll give “Mooch” credit for one thing: he took a middle-class upbringing as the son of a crane operator of Italian heritage from North Hempstead, Long Island and turned it into a successful career in finance. I find it hard to believe he doesn’t understand the meaning of terms like “hard work” and “personal sacrifice.” For many people, myself included, his story is a realization of the “American Dream.” He strikes me as a tough but genuine, no-nonsense person who’s not afraid to provide an honest, unvarnished opinion on anything he’s passionate about. And while I’ve never seen any of his other podcasts, I enjoy his “Speak Up with Anthony Scaramucci” segments on Wealthion. His guests are always interesting and provide fascinating insight, like this one with author and private wealth manager Barry Ritholtz:



But to your other comments, specifically as they relate to the U.S. as a debtor nation, they do get to the real source of the problem: we spend too much. We don’t save enough and invest it in the future productive capacity of the country. We invest in unproductive things, like chits that we trade and hope increase in value thanks to inflation and human psychology. “Mooch” and his wealth are at least to some extent a product of “investing” and trading in these chits. Honestly, how would investments in bitcoin and solana have benefited his working-class parents and grandparents in Long Island? Can you tell me?

Basically, we are living on acorns Anthony’s forbears and people like them earned in the last century that allowed us to be entrusted with the life savings of the planet as its banker. There was a time, in fact for a large part of American history, when a dollar was literally “as good as gold.” For the 99-year period from 1834 to 1933, you could walk into a bank and trade currency for gold at a fixed exchange rate of $20.67 per ounce. The country didn’t implode because of it. In fact, it underwent a period of rapid growth, and when it did falter it tended to recover relatively quickly. In the “stable” Federal Reserve period, we still haven’t managed to end the business cycle and still experience financial panics. It’s just that it now takes longer to recover from them, and every succeeding bust is larger than the one that preceded it. Sometimes it seems like I’m still stuck in 2008, except everything costs more.

Since the U.S. completely severed the dollar from gold convertibility in 1971, the aura that the dollar still retained value was buttressed by the ability to borrow and the fact that we had what economist Muhamad El-Erian calls “the cleanest shirt” in a pile of dirty shirts. It allowed us to live well-beyond our means. Where is it ordained that the United States will always have the world’s premier reserve currency? It’s not. We need to get our fiscal house in order, and Americans need to stop spending like drunken sailors. No one ever spent himself to prosperity. But history says we won’t fix things until we’re forced into it with some sort of crisis like the one we faced in the early 1980s the last time Social Security was close to insolvency.

Meanwhile, life will go on. But Americans who don’t own chits representing real assets—working stiffs and pensioners with little disposable income—will continue to get poorer as the real purchasing power of their dollars decline over time. Trump likely just sped up the process.