World Treasury Yields Soar due to a 'Fire Sale' of Treasuries

A dramatic selloff in longer-term U.S. Treasuries has intensified, leading to the most severe drop in these traditionally stable assets since 2020. Investors fled 30-year government bonds, briefly pushing their yields above 5%. The steep climb in yields reflects growing fears that the newly imposed tariffs under President Donald Trump could push the U.S. into a recession while also triggering inflation—two developments that could significantly restrict the Federal Reserve’s ability to respond effectively with policy measures.

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Though the selloff began to ease during European trading hours, it left many wondering why investors were turning away from what are usually considered the safest securities in the world. Calvin Yeoh, portfolio manager at Blue Edge Advisors Pte., described the move as a “fire sale,” noting that he hasn’t witnessed volatility of this scale since the financial turmoil during the pandemic. Yeoh himself is offloading 20- to 30-year Treasury futures as part of his strategy.

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Over the past three sessions, the 30-year yield has spiked by approximately 40 basis points—the sharpest rise since November 2020. On Wednesday alone, yields were up by two basis points to 4.79%, after an earlier climb of as much as 25 basis points.

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Such a steep increase in yields has wide-reaching implications, impacting everything from mortgage rates to corporate borrowing costs. It also challenges Treasury Secretary Scott Bessent’s aim to reduce borrowing expenses for businesses and consumers. Traditionally, U.S. government bonds have been a cornerstone for building investment portfolios, providing stability and safety due to the country’s strong credit profile.

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Now, Wednesday’s 10-year note auction is being viewed as a critical barometer of market sentiment, with even more attention expected for Thursday’s 30-year bond sale.

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Meanwhile, global markets continued to show signs of stress. European and Asian stocks declined, with the Stoxx Europe 600 index down nearly 3%. On the other hand, S&P 500 futures remained mostly flat. Some investors took a cautious sigh of relief from China’s lack of immediate retaliation to the new U.S. tariffs, which could signal a pause or softening in the ongoing trade conflict. Elsewhere, the U.S. dollar weakened, and Brent crude oil prices fell toward $60 per barrel.

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The bond market’s reaction wasn’t limited to the U.S. Yields in the U.K., Australia, and Japan also surged. But the U.S. Treasury market’s spike drew the most attention, partly because it defied typical behavior during financial stress, when yields usually decline. Theories abound as to the cause, especially since markets didn’t appear to be under the kind of strain that usually drives such sharp moves.

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One factor may be the weak demand for three-year Treasury notes in an auction held Tuesday. That poor showing added to anxieties ahead of upcoming auctions for longer-dated debt. Some market watchers worry that deeper, less visible risks are at play. These could include foreign governments offloading U.S. debt or large investors rapidly liquidating positions to raise cash.

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Another possible explanation is that hedge funds might be unwinding leveraged bets at a rapid pace—similar to the “basis trade” debacle of 2020. In particular, the sudden breakdown of a strategy that involved betting on Treasuries outperforming interest-rate swaps may have added to the market’s instability.

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Sophie Huynh of BNP Paribas Asset Management noted that “U.S. exceptionalism is being reassessed,” warning that the market may be heading into a dangerous spiral. George Saravelos at Deutsche Bank added that the situation could push the Federal Reserve to intervene with emergency purchases of Treasuries if volatility persists.

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Some investors believe global reserve managers—like those in China—could be reevaluating their holdings of U.S. debt in light of Trump’s aggressive trade policies. If confirmed, such a move would undermine Treasuries’ reputation as a global safe haven. China and Japan, two of the largest holders of U.S. debt, have already been gradually reducing their holdings, according to official data.

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Kenichiro Kitamura from Meiji Yasuda in Tokyo speculated that China might be selling Treasuries in retaliation for the new tariffs. He emphasized the role of politics over traditional market dynamics, saying he prefers to stay on the sidelines until more clarity emerges.

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Despite the upheaval, not everyone believes Treasuries have lost their safe-haven status. Leah Traub of Lord Abbett & Co., which manages $217 billion in assets, recalled how Treasuries rallied in March when investors feared a potential U.S. recession. “In the event of a U.S. or global downturn, we still expect investors to return to Treasuries,” she said.

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Volatility measures have spiked in recent days. A key gauge of Treasury volatility reached its highest point since October 2023. Currency fluctuations are also at their most volatile level in two years, and the VIX index—a measure of equity market fear—has climbed to an eight-month high.

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“There’s a temporary buyer’s strike in the U.S. bond market,” said Homin Lee of Lombard Odier. However, he believes the Federal Reserve still has tools to help stabilize the market if conditions worsen.

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