Does this signal the start of a crisis in the US bond market or even in the dollar? In mid-April, 10- and 30-year yields on US debt experienced their biggest surge since the Covid crisis. A worrying phenomenon. Normally, in times of crisis, investors seek refuge in the safest assets, such as gold, the Swiss franc, the yen and… US debt.
“The only really serious scene is the monetary scene, not the equities scene or the bond market. The Trump administration has been knocked out by the Treasury bond market. The holders have a gun pointed at the heart of the American state. This market has shaken up the Trump administration in its tariff policy… Boring when you know that the United States has to refinance every day, now at higher rates,” Alain Minc said on LCI on 16 April.
What happened? The start of a crisis of confidence in US debt? Manipulation?
Strangely enough, in an unusual move, the US Treasury bond market experienced massive selling on several consecutive days before mid-April. The yield on 10-year Treasury bonds soared to 4.592%, a jump of 0.6% in just a few days. In times of uncertainty, the opposite is usually true. Treasury bills are seen as a safe haven and should have benefited from security purchases. What’s more, fears of a recession are on the rise, and this is having the mechanical effect of pushing yields down.
” It’s a paradoxical move given that this asset is considered a safe haven in these troubled times,” adds Julien Boy, Bond Manager at Rothschild & Co Asset Management. But what happened? “A good question,” replies Arnaud Colombel, Head of Credit Management at Mandarine Gestion. “Fears of a resurgence in inflation, which had materialised a little earlier, may have been the reason… but who sold? Probably foreign investors, who hold around 30% of US debt. The focus is particularly on Asian investors, who have been hard hit by the tariffs announced by Trump,” adds Arnaud Colombel.
Enguerrand Artaz, Strategist at Financière de l’Echiquier, agrees: “At the same time as these sales of Treasury bonds, the dollar has fallen against most currencies, which is also unusual and suggests that foreign holders of US debt have offloaded part of their position, against a backdrop of aversion to US assets, or even in an attempt to put pressure on the United States. From this point of view, suspicions naturally fall on China, the second largest foreign holder of US debt (after Japan), which is engaged in an intense trade tug-of-war with Donald Trump”
Christopher Dembik, Investment Strategy Adviser at Pictet AM, is more cautious and sees it more as a market phenomenon: ” There are rumours that China has dumped US Treasuries. But when you look at the Chinese statistics, nothing confirms this. Beijing did not sell more US bonds than usual. It can be estimated that both US institutional investors and foreign investors from all countries have reduced their exposure to US debt and the dollar. This is a risk reduction operation, not a retaliation to the tariff war
China is America’s second largest foreign creditor after Japan, holding around $760 billion in Treasury securities. Some continue to point to a move by China, which may have wanted to send a warning to the US administration that it was capable of wreaking havoc with US debt. Another anonymous speaker explained: “The Chinese authorities are said to have sold American Treasurys and converted the proceeds into euros or German Bundesanleihen. It’s actually very consistent with what happened”, he added. This is because German bonds have seen a significant fall in long-term yields, more specifically the 10-year bond (from 2.65% to 2.48% over the same period).
Shot in the foot?
However, a rapid and massive sell-off will lead to a fall in the value of the bonds. In other words, China would suffer losses in its stock of US bonds. And if the sale is converted into Yuan, the Chinese currency would appreciate against the dollar, whereas Beijing is aiming for exactly the opposite, unless they are immediately reinvested in euros… The sale of Treasury securities by China would constitute a veritable attack..
Scott Bessent, Secretary of the Treasury, was inundated with anguished calls from the financial world over the weekend following this crazy week, according to the Wall Street Journal, and is said to have convinced Trump that a pause was needed in his tariff policy.
The role of Japan, the largest holder of US debt, was also called into question. An opposition MP reportedly floated the idea of using treasury bills as a negotiating tool in bilateral trade talks.
But Japanese life insurers, large holders of US debt, may also have switched to the sell side, concerned about US policy and keen to reduce their exposure. There’s not much the Japanese government can do here..
Enguerrand Artaz, Strategist at Financière de l’Echiquier, adds a further explanation: “With the sharp rise in volatility in recent weeks, hedge funds may have to lower the leverage of their strategies for risk control reasons. It seems that a large part of the selling pressure on Treasuries in recent weeks has come from unwinding, rather than from massive selling by foreign government holders
Hedge funds and Bond Vigilantes
Indeed, as the fall in US bonds gathered pace, hedge funds could have been forced to unwind positions in bonds, an asset that is just as easy to sell, under the impact of emergency margin calls that require liquidity quickly, and this emergency unwinding would have added fuel to the sell-off.
“The Bond Vigilantes have struck again,” wrote Ed Yardeni, who pointed to these market moves as a sign that Trump’s policies were wrong.
Julien Boy, Bond Manager at Rothschild & Co Asset Management adds: “The risks of high inflation and an increase in already large deficits in the event of a recession have led to a loss of confidence in US assets. On the other hand, investors also anticipated less demand from foreign buyers of longer-dated US Treasuries, assuming that the US trade deficit with its trading partners rebalanced. Lastly, technical movements accentuated the rise in rates: diversified fixed-income/equity funds and some pension funds reallocated to equities, while hedge funds had to unwind highly leveraged positions in the basic trade of buying Treasuries and selling futures.
But behind all the speculation is the perception of diminishing confidence in US policies, which considerably weakens the Treasury’s appeal as a safe haven, while also revealing its vulnerability.
This is confirmed by Enguerrand Artaz of L’Echiquier. “On has also seen a fall in the dollar, which is also unusual.” Sign of loss of confidence in US assets.
Seismic tremors for the dollar
The euro dollar is no longer moving in the usual direction dictated by the interest rate differential between Europe and the United States. Rates are much higher on the other side of the Atlantic than on the Old Continent, but this does not benefit the dollar but the euro. Trump has become an unexpected ally of the euro..
Finally, in one of his latest flashes, Christopher Dembik highlights the state of a seized-up bond market, with historically high bid-ask spreads for off-the-run corporate bonds. The high yield market is frozen on both sides of the Atlantic due to a lack of visibility. In the event of a US recession, the Pictet AM specialist does not rule out a fall in the dollar against the euro of up to 20%. But a recession is not Pictet AM’s central scenario.
