The unusual surge in long-term Treasury yields has rattled investors in the aftermath of President Trump’s tariff-fueled “Liberation Day” — and the catalysts behind the turmoil could have a ripple effect across the entire financial ecosystem.
As of Wednesday’s close, the 10-year yield (^TNX) jumped another 14 basis points to trade around 4.40%, even as Trump announced a 90-day pause on reciprocal tariffs for a swath of countries and also raised tariffs on China. That represents a massive 53 basis point swing from Monday’s low of 3.87% — and the biggest three-day jump since December 2001.
Following the latest tariff news, the 30-year yield (^TYX) posted more modest gains but still rose 8 basis points after it logged its biggest move to the upside since March 2020 earlier in the week. After the market close, the 30-year yield traded at 4.79%.
Yields and bonds are inversely correlated, meaning higher yields equal falling bond prices.
“The Stock and Bond Vigilantes signal that the Trump administration may be playing with liquid nitro,” Ed Yardeni, president of Yardeni Research, said in a research note published on Tuesday. “Something may be about to blow up in the capital markets as a result of the stress created by the administration’s trade war. If so, then the S&P 500 will fall into a bear market for sure.”
On Wednesday, President Trump admitted he’s had his eye on the recent surge in yields, telling reporters on the White House Lawn, “The bond market is very tricky. I was watching it. But if you look at it now, it’s beautiful.”
“Last night people were getting a little queasy,” he added. “The big move wasn’t what I did today. The big move was what I did on Liberation Day.”
Notably, the recent surge has landed the 10-year yield back to where it was at the end of February.
‘Something has broken’
The bond market serves as a “cash collateral” of sorts to investors who can then borrow money and bet on riskier assets like stocks. It’s also viewed as a safe haven during times of uncertainty, which has been the word du jour as Wall Street remains on edge that shifting trade dynamics could induce a self-inflicted recession.
That’s why the moves in yields have been confusing. As tariff and recession headlines rattle through markets, investors should (in theory) be buying more bonds to protect themselves against surging inflation and deteriorating growth.
Quite dramatically, that hasn’t been the case. So what’s going on?
“Something has broken tonight in the bond market,” market veteran Jim Bianco said late Tuesday in a post on X. “We are seeing a disorderly liquidation. If I had to GUESS, the basis trade is in full unwind.”
The basis trade, a highly levered trading strategy most often used by hedge funds, occurs when traders attempt to profit from a small price gap between Treasury futures and actual government bonds.
The basic idea is to buy the bonds at a cheaper price and “short” the more expensive futures contract with the hope the two prices will eventually merge.
Think of it this way: Let’s say you buy a concert ticket for $100 today but your friend agrees to pay you $110 for the ticket five days before the show. As the initial buyer, you know the two prices will eventually merge the closer you get to the concert, and can then lock in that small profit of $10.
The problem? Hedge funds use a lot of borrowed money to do this at scale — sometimes up to 100 times in leveraged bets — which means if the price gap worsens, those small moves can create significant losses.
Torsten Sløk, partner and chief economist at Apollo Global Management, said Tuesday that “exogenous shocks” like tariffs or an economic recession could “rapidly” unwind those highly leveraged positions and disrupt current market conditions. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
At the same time, if the supply of Treasurys expands due to a growing budget deficit or the Fed reducing its balance sheet through quantitative tightening, that could also depress Treasury prices, “hurting the long leg of the trade.”
But the basis trade unwind is not the only dire theory on Wall Street. There’s also a concern foreign investors might start selling their US Treasurys.
“With all of this back-and-forth with China, there’s a possibility that they stop buying and boycott our debt,” Steve Sosnick, chief strategist at Interactive Brokers, told Yahoo Finance’s Josh Schafer in a phone interview on Tuesday. “Japan has the largest stock of Treasurys, but China has been a big buyer. What happens if that source of foreign demand shrinks or dries up completely?”
In that case, Sosnick said, the US Treasury would have to issue at higher rates in order to make up for the loss: “The supply is not going down anytime soon, right? But you’re going to have to do something about demand.”
And if markets are having a difficult time pricing low-risk assets like Treasurys, Sosnick added, “they’re certainly not going to have an easy time pricing higher-risk assets, like equities or crypto or anything of that nature.”
