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"Market participants said the declines in the $29tn Treasury market on Monday reflected several factors, including hedge funds cutting down on leverage — or borrowing used to magnify trades — and a broader dash for cash as investors sheltered from swings in the wider market."
"Investors and analysts pointed in particular to hedge funds that took advantage of small differences in the price of Treasuries and associated futures contracts, known as the 'basis trade'. These funds, which are large players in the fixed-income market, unwound those positions as they cut back on risk, prompting selling in Treasuries."
So, you are saying inflation caused investors to dump treasuries.
Because they think Fed will raise rates? Or, because they think treasuries will not keep up?
I discounted the former because I felt the inflation will not be caused by demand, so I am doubtful the Fed would raise rates more.
I did not think about the latter. But, I did not see a rush to buy equities (except briefly because of false pause report), so what is the alternative?
@Observant1. Thanks. That helps. Well, helps with understanding. It just did not make sense to me what happened today. Last Thursday was text book. But not today.
U.S. Treasuries extended a sharp retreat on Tuesday as investors were having to sell bonds to cover losses in other assets and scrambled to unwind expectations for deep U.S. rate cuts, in the latest unsettling sign of possible stress in financial markets.
/snip
"What do you sell if you need to meet margin calls or liquidity? Treasuries and gold," said Martin Whetton, head of financial markets strategy at Westpac in Sydney.
Still lurking in the weeds are bond vigilantes and angry international markets deciding to stick it to Uncle Sam.
At the risk of getting all political, nobody knows what capitulation looks like because it all depends on how long Trump sticks with tariffs.
@gman57. Yay. Predicting rates seems as hard as predicting equity markets. Maybe harder. In crash's recent post, I see BlackRock's Fink remains contrarian on rates.
If the Toddler will not reverse course or even apply some patches, this ship is sunk. Cash is the only life-preserver I'd reach for. Just as a high tide lifts all boats, it brings them all down together when it lets out.
It's tempting to short the S&P, but that's another discussion entirely.
[from Chase Taylor last week] “Let me keep this as simple as I can. If this policy is not meaningfully changed this year – we will enter a Depression. If we meaningfully change it this summer, we will have a tough recession. If we meaningfully change this policy before it takes effect next week, we will face an ugly slowdown but survive it ok. I know many folks think there is a master plan, but master plans have folks doing the work – not using LLMs to tariff penguins and not even use tariffs in the calculations for how much to tariff folks. We have significant tariffs now on things like coffee and bananas (we do not grow those in the US), underwear, cheap toys, etc. Things we either cannot or should not even produce in the US. Plus making food more expensive is unfathomably bad policy. If a lot of the dumbest tariffs are not taken off before next Friday – this may be the worst economic policy any of us will ever witness in our lives.”
People always say bonds are the safety play when the market goes down. They're not. In most the downturns I can remember when stocks go down bonds go down. Not nearly as much as stocks but same direction.
Intensifying Selloff in U.S. Treasurys Stirs Fears
An aggressive selloff in longer-term U.S. Treasurys overnight sent a worrying sign to markets that almost no asset is safe as President Trump’s sweeping new tariffs go into effect.
The yield on the benchmark 10-year U.S. Treasury note spiked as high as was 4.51%, according to Tradeweb. That was up from around 4.26% in afternoon U.S. trading Tuesday and less than 4% at the end of last week. The yield on the 30-year bond hit nearly 5%.
Yields on both bonds edged off their highs by 5:30 a.m. ET, but remained higher than Tuesday. The dollar also weakened against other major currencies.
Yields, which fall when bond prices rise, initially plunged after Trump announced his new tariffs on April 2, reflecting a flight to safer assets as investors sold riskier assets like stocks.
Longer-term yields, however, reversed course on Monday and took another leg up Tuesday after a $58 billion auction of 3-year notes met with tepid demand from investors.
“Given this big shock, with the tariffs and everything, people are just nervous,” said Thanos Bardas, global co-head of investment-grade fixed income at Neuberger Berman.
For bond investors, the sharp rise in yields is uncomfortably similar to a brief selloff that occurred at the depth of the Covid meltdown, when traders sold whatever they could to raise cash.
In this case, analysts and investors say there is broad nervousness about holding longer-term Treasurys ahead of government auctions of 10-year notes on Wednesday and 30-year bonds on Thursday.
One concern of U.S. investors is that overseas private investors or foreign central banks could sell Treasurys in reaction to Trump’s tariffs.
Investors are also worried that tariffs will drive up consumer prices even as they slow U.S. growth.
That has increased the appeal of owning short-term bonds, which could benefit if the Federal Reserve cuts interest rates, relative to longer-term Treasurys, which are especially vulnerable to inflation.
Once yields started rising this week, the move was accelerated by selling from hedge funds forced to close out various trades that benefited from falling yields, analysts said.
There is a good reason why I'm in MM. When risk is very high, emotions are out of control. No way to predict the future. I sell first quickly and ask questions later. MOVE (bond volatility) greater than 110 is a good indication. BTW, the pros are not better than main street. Many times they increase the fire and panic as well. I can come up with 2 explanations: the inflation is not as low as the Fed like and jobs creation isn't low for the Fed to do anything, AKA, cutting rates. This is why rates are tracing back some of what they lost.
Comments
and a broader dash for cash as investors sheltered from swings in the wider market."
"Investors and analysts pointed in particular to hedge funds that took advantage of small differences in the price of Treasuries and associated futures contracts, known as the 'basis trade'. These funds, which are large players in the fixed-income market, unwound those positions as they cut back on risk, prompting selling in Treasuries."
https://www.ft.com/content/623971a1-cd93-43c2-ad8d-ba8815339a24
Financial Times article may be paywalled.
So, you are saying inflation caused investors to dump treasuries.
Because they think Fed will raise rates? Or, because they think treasuries will not keep up?
I discounted the former because I felt the inflation will not be caused by demand, so I am doubtful the Fed would raise rates more.
I did not think about the latter. But, I did not see a rush to buy equities (except briefly because of false pause report), so what is the alternative?
Aside from previous comments
Reuters reports: Still lurking in the weeds are bond vigilantes and angry international markets deciding to stick it to Uncle Sam.
At the risk of getting all political, nobody knows what capitulation looks like because it all depends on how long Trump sticks with tariffs.
Markets reversed this morning's relief rally and are now flirting with red wth 90m to the close.
I expect tomorrow to be quite red as the latest China tariffs from the Toddler go into effect and they respond.
Hold on... gimme a minute... aren't his MAGA hats made in China? Maybe an exemption for those...
It's tempting to short the S&P, but that's another discussion entirely.
how late is too late?
[from Chase Taylor last week]
“Let me keep this as simple as I can. If this policy is not meaningfully changed this year – we will enter a Depression. If we meaningfully change it this summer, we will have a tough recession. If we meaningfully change this policy before it takes effect next week, we will face an ugly slowdown but survive it ok. I know many folks think there is a master plan, but master plans have folks doing the work – not using LLMs to tariff penguins and not even use tariffs in the calculations for how much to tariff folks. We have significant tariffs now on things like coffee and bananas (we do not grow those in the US), underwear, cheap toys, etc. Things we either cannot or should not even produce in the US. Plus making food more expensive is unfathomably bad policy. If a lot of the dumbest tariffs are not taken off before next Friday – this may be the worst economic policy any of us will ever witness in our lives.”
Stocks Are in Turmoil, but Treasury Yields Are Stubbornly High
https://youtu.be/KpnUyGM5M-I
What Is The Basis Trade?
Hedge Fund Treasury Trading
Torsten Sløk does a good job explaining the Basis Trade and its risks.
I wasn't aware that hedge funds' bets may be leveraged up to 100 times! (☉_☉)
Intensifying Selloff in U.S. Treasurys Stirs Fears
An aggressive selloff in longer-term U.S. Treasurys overnight sent a worrying sign to markets that almost no asset is safe as President Trump’s sweeping new tariffs go into effect.
The yield on the benchmark 10-year U.S. Treasury note spiked as high as was 4.51%, according to Tradeweb. That was up from around 4.26% in afternoon U.S. trading Tuesday and less than 4% at the end of last week. The yield on the 30-year bond hit nearly 5%.
Yields on both bonds edged off their highs by 5:30 a.m. ET, but remained higher than Tuesday. The dollar also weakened against other major currencies.
Yields, which fall when bond prices rise, initially plunged after Trump announced his new tariffs on April 2, reflecting a flight to safer assets as investors sold riskier assets like stocks.
Longer-term yields, however, reversed course on Monday and took another leg up Tuesday after a $58 billion auction of 3-year notes met with tepid demand from investors.
“Given this big shock, with the tariffs and everything, people are just nervous,” said Thanos Bardas, global co-head of investment-grade fixed income at Neuberger Berman.
For bond investors, the sharp rise in yields is uncomfortably similar to a brief selloff that occurred at the depth of the Covid meltdown, when traders sold whatever they could to raise cash.
In this case, analysts and investors say there is broad nervousness about holding longer-term Treasurys ahead of government auctions of 10-year notes on Wednesday and 30-year bonds on Thursday.
One concern of U.S. investors is that overseas private investors or foreign central banks could sell Treasurys in reaction to Trump’s tariffs.
Investors are also worried that tariffs will drive up consumer prices even as they slow U.S. growth.
That has increased the appeal of owning short-term bonds, which could benefit if the Federal Reserve cuts interest rates, relative to longer-term Treasurys, which are especially vulnerable to inflation.
Once yields started rising this week, the move was accelerated by selling from hedge funds forced to close out various trades that benefited from falling yields, analysts said.
When risk is very high, emotions are out of control. No way to predict the future. I sell first quickly and ask questions later.
MOVE (bond volatility) greater than 110 is a good indication.
BTW, the pros are not better than main street. Many times they increase the fire and panic as well.
I can come up with 2 explanations: the inflation is not as low as the Fed like and jobs creation isn't low for the Fed to do anything, AKA, cutting rates.
This is why rates are tracing back some of what they lost.