What is going on in the US bond market? What is usually a hebetudinous corner of Wall Street has morphed into must-see television viewing. As investors wiped the blood off their clothes following the tariff-fueled selloff, traders did not seek refuge in Treasury securities – or did they? Despite the treasure trove of information readily available to market participants, observers have been confused about why yields on US debt have been climbing amid intense volatility.
Why the Bond Market Matters
In February, Treasury Secretary Scott Bessent told Fox Business Network’s Larry Kudlow that he and President Donald Trump are focused on the ten-year yield. This comment was a message to the financial markets that the administration is no longer concentrating on what the Federal Reserve does or does not do. Bessent pointed this out weeks later, noting that the president had been relatively quiet about Fed Chair Jerome Powell and the US central bank.
Rather than waiting for the Eccles Building to keep cutting interest rates – monetary policymakers have paused their easing cycle this year – White House officials would do the work themselves. Indeed, there is a sense of urgency for consumers and the broader federal government. Of course, the situation is far worse for Uncle Sam with $5 trillion to $9 trillion worth of debt that needs to be refinanced over the next 12 months. If the benchmark ten-year yield can fall, taxpayers would save billions in interest payments.
This has been the working theory among economic observers: Bessent and the Trump administration are throwing a missile at the financial markets to lower Treasury yields. The plan appeared to be working in the aftermath of Liberation Day, with yields drowning in a sea of red ink. The ten-year yield, for example, cratered temporarily below 3.8% in intraday trading on April 4. However, the ten- and 30-year yields rebounded about 50 basis points before paring some of their gains, touching 4.4% and 4.8%, respectively (as of April 15).
This has confounded market observers since they tank when investors pour into conventional safe-haven assets to protect themselves from the turmoil.
Likewise, the greenback has plummeted simultaneously. The US Dollar Index (DXY), a barometer of the buck against a weighted basket of currencies like the British pound and Canadian dollar, has crashed 8%, falling to its lowest level in three years.
Big Trouble in Little China
Recent Treasury auctions resulted in robust domestic and foreign demand for long-term bonds.
So, if private investors are not shying away from the most liquid bond market in the world, who is? There has been widespread speculation that China, the second-largest foreign holder of US debt, is shedding its holdings. Treasury data indicate that Beijing holds approximately $760 billion in Treasury securities and has been gradually unwinding its positions for nearly three years.
Since official data will not be released until the summer, investors sought elsewhere to determine if the Chinese regime was dumping its Treasurys. One avenue to explore is the currency markets. Over the past week, the offshore Chinese yuan has appreciated 1.3% against the greenback, offsetting the 1% decline since March 15. This year, the yuan has been flat against the buck.
This could be a sign that some selling has been going on, even if the strategy was employed using backdoor channels, which some market analysts have said could be the case. However, a strengthening yuan would further pressure China’s economic weapon: exports. With the US tariff rate of 145% on Chinese goods entering the country, Beijing is gradually being priced out of the world’s largest market, and a stronger yuan would worsen the nation’s situation.
Does Chinese leader Xi Jinping want to punish the United States or protect his economy? Experts have expressed doubt that Beijing would pull the trigger. "It will do quite a significant damage to the United States, but the damage to China might be even bigger,” Philipp Ivanov, the founder of Geopolitical Risks & Strategy Practice, told CNBC TV18. Capital Economics chief Asia economist Mark Williams warned in an interview with the London Telegraph that this measure would "backfire hard."
It is no secret that China has been diversifying its reserves, particularly on the gold front. This has meant the government has incrementally reduced its exposure to US assets. A sudden decline could lead to unintended consequences for the Chinese Communist Party. So, how could China retaliate? A total ban on rare earth mineral exports would be one tactic, considering how it would decimate US military preparedness. But Treasury securities? That could be too much of a risk.
It is all a delicate balancing act.
Hiccups and Indigestion
Was it a market blip or part of a broader movement? Bessent is unconcerned, telling Bloomberg TV in an April 14 interview that you cannot look at what happens over one week but rather during a period of time. “I, for better or worse, have lived through a lot of these things, and in trading, personal trading history is the scar tissue that sticks with you the most,” he said.
However, Minneapolis Federal Reserve Bank President Neel Kashkari suggests that global investors are willing to engage in a US exodus. “Normally, when you see big tariff increases, I would have expected the dollar to go up. The fact that the dollar is going down at the same time, I think, lends some more credibility to the story of investor preferences shifting,” Kashkari told CNBC’s Squawk Box.
Where could they go? Perhaps they caught a case of Europhoria after the decades-long disease known as Europhobia. Maybe they are hopping over to Asia, thinking that Trump is becoming more lenient on trade. Or perhaps it is Occam’s Razor: The simplest explanation is the most correct. In this instance, some overleveraged bigwig on Wall Street fled to gold. Still, the world will not know until the April Treasury numbers are published this summer. Hold your family close.
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