During the second week of April, US Government bonds — commonly referred to as Treasuries — experienced a significant selloff. Yields on 10-year Treasuries surged by 0.5%, which is an unusually large move that typically only happens when markets are recovering from a major shock and investors feel less need to hold US Government debt, which is often considered the safest place to park money.
Despite the sharp move, 10-year yields are still sitting near the midpoint of their six-month trading range, currently a little below 4.4%.
Australian Government bonds followed the US lower, selling off in sympathy. Yields climbed by 0.3%, leaving them also just under 4.4%, which is roughly in line with their six-month average.
The recent selloff is being largely attributed to four key factors:
1. Foreign selling driven by trade tension
Retaliatory selling by foreign holders has been cited as a driver, as ongoing trade tensions escalate. According to the US Treasury Department, China held $760 billion or 3% of US Government debt as at the end of 2024.
2. Stubborn inflation
Recent inflation data suggests that price pressures have either stalled in their decline or may even be reaccelerating. Since bonds pay interest in nominal terms — meaning they do not adjust for inflation — higher inflation erodes their future real return, making them less attractive.
3. Fiscal deficits
The Trump administration continues to push for measures to rein in the massive $1.8 trillion federal deficit. However, markets remain sceptical, particularly as actual spending cuts appear limited and policymakers continue to hint at potential tax cuts — a combination that could see government borrowing rise even further.
4. Basis trade unwinding
The basis trade is a strategy, mostly used by hedge funds, that arbitrages the small price difference between US Treasury bonds and their corresponding futures contracts. Since these price gaps are usually tiny — just a few basis points — investors typically use significant leverage (often 20 to 50 times) to make the trade worthwhile. While this works well in stable markets, rising yields and increased volatility can force funds to unwind these positions quickly, adding extra selling pressure to the bond market.
While none of these factors are alarming on their own, together — especially against a tense geopolitical backdrop — they can magnify market volatility.
Looking beyond the short-term noise, however, we see this as a potential opportunity. Although yields may drift higher, we don’t believe the current pressures are enough to threaten the US Treasury’s safe haven status. Viewed through a long-term lens, this recent move is well within historical norms and may offer investors a chance to lock in more attractive yields.