Treasury Turmoil Exposes Fragile Core of U.S. Markets | Image Source: www.cnbc.com
NEW YORK, April 8, 2025 – The turbulence in the US Treasury market on Monday sparked a chill through Wall Street, raising deeper concerns about the hidden risks that arise in the US financial architecture. What appeared to be an ordinary market movement quickly turned into a syringe episode, revealing how a complex and dark strategy – known as basic trade – could threaten the liquidity and stability of the world’s largest bond market.
What put the alarm on the treasury market?
On April 7, a dramatic increase in the long-term U.S. Treasury produced affected analysts and investors. The performance of the 10-year Treasury jumped in 17.2 basis points, one of the largest movements of a day in more than a year. At a glance, such an increase in performance may not raise the eyebrows, until I consider it to have come despite a significant sale in the stock. As a general rule, bond prices increase (and yields decrease) when shares decline as investors seek collateral. But not this time.
“Something very unusual happened yesterday in the financial markets,” wrote Torsten Slok, Chief Economist of Apollo Global Management. According to Slok, the culprit can be a “unlocking parallel trade,” a popular leverage strategy between hedge funds that bet on price differentials between Treasury futures contracts and underlying bonds.
What is the basis of trade, and why is it important?
Basic trade, though dark for the average investor, plays an important role in the dynamics of the Treasury market. It is about buying a bonus from the US Treasury and simultaneously selling a futures contract from the Treasury on the same security. Target? Take advantage of the price difference between the cash bonus and the futures contract, a gap called “base”. “
This potential for arbitration is largely due to regulatory cranks and margin differences. Traders use borrowed money to boost yields, sometimes in leverage ratios greater than 50: 1. He’s not a guy. According to some estimates, trade reached about $800 million, which would affect Switzerland’s GDP.
But the problem is not just the size. It’s fragility. As Slok warned, an unexpected shock – such as a political surprise or a global sale – could force hedge funds to quickly unlock these stores. When this happens, Treasury bonds flood the market, distribution banks struggle to absorb surplus stocks, and liquidity declines rapidly.
Is it just an incident or a systemic problem?
This week’s agitation could be the tip of the iceberg. According to the economists of the Federal Reserve, trade based has helped absorb the overemission of the Treasury as U.S. deficits and waves of foreign demand increase. But its strong dependence on leverage created a fragile base, vulnerable to sudden collapse.
As Bloomberg said in March, a group of financial market experts urged the Fed to consider establishing an emergency facility that could free these shocks in the event of a crisis. The recommendation highlights a growing concern that structural market weaknesses can be eliminated from control if not corrected.
To illustrate the risk, consider this analogy: Basic trade is like stacking domino. As long as conditions remain stable, everything remains high. But an unexpected surge - being a geopolitical shock, a peak of inflation or a political error – could lead to a cascade collapse. The Treasury market, long regarded as the basis of global financing, is no longer immune from the tremors of speculative trade.
Are foreign central banks involved?
A theory floating this week was that foreign central banks were throwing away Treasurys, perhaps in retaliation for rising US tariffs. But this opinion is contested. Jim Bianco, President of Bianco Research, said that if such a bandage really happened, we would expect the US dollar to weaken. Rather, it was strengthened – a sign that foreign reserve managers were probably not the main drivers of the peak yield.
However, the broader trade conflict between the United States and China creates sufficient uncertainty to indirectly influence returns. On April 2, former President Donald Trump announced new aggressive tariffs, including a 10% unilateral import tariff and possible reciprocal measures. A few days later, it raised the ante, threatening additional bonds of 50% on Chinese imports, unless Beijing terminates its own tariffs of 34%.
In response, China promised “to fight in the end”, preparing the ground for an escalation that recalls the 2018-2019 commercial war. The spectrum of renewed inflation, interrupted supply chains and global growth winds have returned to persecuted investors.
How do markets respond to Trump’s tariffs?
As bond yields increased in response to inflation fears, the stock was an impressive rebound Tuesday. The S; P 500 clamp increased by 2.8%, the Dow Jones industrial average added more than 1,000 points and the Nasdaq composite increased by 3.3%. Investors seemed to be betting that the Fed might be forced to react to market volatility and economic uncertainty with tariff reductions.
“Because the rates announced so far are higher than expected, we believe that the risk is now reduced to more tariff reductions by the end of the year,” said Saira Malik, Chief Share and Fixed Revenue Officer in Nuveen. Malik noted that his team’s baseline scenario now includes 6.6 interest rate reductions at 2026, up to four earlier forecasts. Its 10-year performance target also decreased from 4.5% to 4.0%.
This reaction reveals a paradox: Investors interpret aggressive trade policies as likely to stop the economy, increase inflationary pressures and ultimately force the Fed to get out. But there is a good line between prudence and chaos. If tariffs trigger a wave of uncertainty, stocks and bonds could suffer, as they did during the 2022 inflation storm.
Is this the time for Trump’s Liz Truss?
Some economists, including Neil Dutta of Macro Renaissance and Bilal Hafeez of MacroHive, have established parallels between Trump’s political trajectory and that of former US Prime Minister Liz Truss. In 2022, Truss’ mini-budget triggered a dramatic collapse of British sovereign bonds, forcing the Bank of England’s emergency intervention. His mandate lasted only 45 days.
Although the United States has much deeper financial markets and greater monetary flexibility, the fundamental lesson remains: Investors can tolerate uncertainty to some extent. But when markets lose confidence in tax and trade policies, the fall can be rapid and unforgivable.
The Treasury market is not only a tool for government loans. The reference point for everything is set, from mortgage rates to student loans. An increase in yields, particularly due to technical winds and geopolitical tensions, can mature in all sectors of the economy.
What if it goes on?
If leveraged stock exchanges continue to dismantle, shock waves can overload the capacity of critical intermediaries that provide liquidity and market in Treasurys. According to Slok, many riders are already “built with capital”. In the worst case scenario, the rest of the market – where the short-term loan is guaranteed by the Treasury guarantee – could be used, in line with the crisp liquidity of September 2019.
As Slok said:
“It would take so much for a short-term wind to be absorbed by a runner who himself is led to capital. This could lead to significant disruptions in the market functions of brokerage companies, such as providing liquidity to the secondary securities market
The system is delicately balanced. The more the leverage is built in the hidden corners of the market, the more a single error, both in politics and in business strategy, can tilt the whole structure.
Then, while the Slamp; P 500 could flash green today, the real story is happening under the surface. The recent Treasury market tannum recalls that even “refuge” assets can become volatile on the basis of a speculative leverage. Bets are not just financial, but systemic.
Sources: According to CNBC, Financial Times, and comment by Apollo’s Torsten Slok.
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