LONDON (Reuters) -Global markets were took a beating again on Wednesday as U.S. President Donald Trump’s eye-watering 104% tariffs on China took effect, and a savage selloff in U.S. bonds sparked fears that foreign funds were fleeing U.S. assets.
U.S. Treasuries extended losses in a sign investors are dumping even their safest assets and the dollar, a traditional safe-haven, was weaker against other major currencies.
Warning signals had been flashing for a few days, as spreads between Treasury yields and swap rates in the interbank market collapsed under a weight of bond selling.
Hedge funds were at the heart of it because their lenders could no longer stomach the ‘basis trade’ – large positions betting on small differences between cash Treasuries and futures prices as markets started to swing on tariff headlines.
COMMENTS:
JAMIE NIVEN, SENIOR FIXED INCOME PORTFOLIO MANAGER, CANDRIAM, LONDON
“Are moves in Treasuries a concern? It is to some extent if the market’s not functioning properly. We’re not there yet, clearly, but at some point we could expect the Fed to take some steps to shore up things. You look at what happened to the curve last night, that was pretty extreme by anyone’s metrics – 2s-10s steepening 30 basis points in a few hours, I’ve certainly never seen that. I’m not sure it’s happened anytime recently.
“We have a very marginal long in Treasuries because the core scenario is that we have recession in the U.S., and therefore 10-year Treasuries at 4.40% look like a good level, but we were very cognisant of these risks – more of the foreign sellers, and also the fiscal side of things – so we didn’t have a very large position in Treasuries.
“We are now looking at that with interest, given the level, and the potential for the Fed to shore up the Treasury market.”
KENNETH BROUX, SENIOR STRATEGIST FX AND RATES, SOCIETE GENERALE, LONDON
“Central banks will be watching liquidity carefully for funding. Market turmoil heightens risk of negative shock to growth, disinflationary so eventually rate cuts.”
MICHAEL METCALFE, HEAD OF MACRO STRATEGY, STATE STREET GLOBAL MARKETS, LONDON
“What we are seeing is a move back to cash and also maybe a question of what assets are safe and it seems right now that cash is the only thing. We’re looking at things like the correlation between the dollar and yields. The dollar is not getting support from yields and that suggests the dollar is not a currency safe-haven. The fact that U.S. Treasuries are selling off at the same time as stocks suggests this is a deleveraging move.”
MARK ELWORTHY, HEAD OF FIXED INCOME, CURRENCIES AND COMMODITIES TRADING, BANK OF AMERICA, AUSTRALIA
“This is up there with GFC and COVID level of volatility. Would expect to have some central bank response in the near term if markets continue to behave like they have been in the last 12-24 hours.”
KERRY CRAIG, GLOBAL MARKET STRATEGIST, J.P. MORGAN ASSET MANAGEMENT, MELBOURNE
“The move in the U.S. 10-year over the last day could also be the market starting to focus more on inflation side of equation rather than just growth. There may be also market functioning reasons … and the use of basis trades by hedge funds which may be unwinding.”
“So far the US administration has not been concerned with the market sell-off, and in the past referred to the 10 year yield as its preferred barometer. However, if there is risk to financial stability in the US from the currency policy action, then the administration may have to pay more attention or face the risk of living through their own Liz Truss moment.”
MUKESH DAVE, CHIEF INVESTMENT OFFICER, ARAVALI ASSET MANAGEMENT, SINGAPORE
“These kind of things become problematic if the prime broker starts saying that now, because of the volatility in the underlying Treasury curve, I want to charge you higher margin or I basically want more margins from you for holding the positions for you.
“Those (hedge funds), if they’re not able to fork up the cash or the margins, then they have to unwind those positions … so that’s what happening at the moment. You can see that there’s a huge move in 10-year Treasuries for the last two, three days. It was rallying initially because obviously it was a risk off kind of thing, but now it’s going the other way around because people are looking for cash.
“I don’t see who are the buyers in the Treasury markets at the moment, because even the foreign central banks are not buying it so then obviously it creates a problem in the cash market, in terms of liquidity, in terms of price, in terms of clearing such a huge volume, everything is a issue.”
GRACE TAM, CHIEF INVESTMENT ADVISOR, BNP PARIBAS WEALTH MANAGEMENT, HONG KONG
“Markets are now concerned about China and other countries (could)’dump’ U.S. Treasuries as a retaliation tool. Hence, UST yields up. There has been some spillover to global yields including Japan, which are all up. In the short term, we expect the bond market to remain volatile given the uncertainty over tariffs, potential negotiations, and potential retaliations. Market has been highly sensitive to any progress on tariffs and negotiations. That said, weaker economic data from the US could drive yields down again on worries over rising recession risk.”
JACK CHAMBERS, SENIOR RATES STRATEGIST, ANZ, SYDNEY
“This is beyond fundamentals right now. This is about liquidity. There was, earlier this year, especially in dollar swap spreads, a lot of positioning to be paid swap spreads, on expectations that treasuries outperform swaps.
“Obviously that’s all unwound, and then some. Swap spreads have fallen a very long way in a very disorderly way.”
“It’s relatively esoteric…but as with the plumbing, the plumbing only matters when it’s the only thing that matters.”
(Reporting by Rae Wee, Tom Westbrook and Ankur Banerjee in Singapore, Scott Murdoch in Sydney and Yadarisa Shabong in Bengaluru and Alun John in London; Editing by Neil Fullick, Dhara Ranasinghe)
