The Spike In Yields Isn't China Dumping Treasuries

China Probably Isn’t Dumping U.S. Treasuries

U.S. Treasury bond yields spiked overnight, leading some to suspect China was dumping Treasury bonds. Recall that bond prices move inversely with yields, so if someone sells a lot of Treasury bonds, that will lower the price of the bonds, raising their yields. As ZeroHedge pointed out though, Treasury yields were spiking because the basis trade was blowing up. Let’s break it down.

Understanding The Basis Trade

The basis trade is an arbitrage strategy that takes advantage of the price difference between a futures contract and the underlying asset (often a bond or another security). The goal is to profit from the “basis” — the difference between the spot price of the asset and the futures price.

In the context of U.S. Treasuries, the basis trade typically involves:

• Buying a Treasury bond (long cash bond)
• Selling a Treasury futures contract (short futures)

Traders expect that by the time the futures contract expires, the price of the futures and the cash bond will converge — allowing them to lock in a relatively risk-free profit, especially when they leverage the trade with cheap borrowed money.

Picking Up Pennies In Front Of A Steamroller

You can probably guess where this is heading. The basis trade is the poster child for “picking up pennies in front of a steamroller”:

• ✅ The pennies: Small, predictable profits from the spread between cash Treasuries and futures.
• 🚂 The steamroller: The risk of massive losses if funding costs spike, bond prices move sharply, or market liquidity evaporates — especially when the trade is highly leveraged.

That metaphor really captures the asymmetry: small upside vs. potentially catastrophic downside. It's one of those trades that works… until it really, really doesn't.

A Deeper Dive With Jim Bianco

Jim Bianco of Bianco Research posted an excellent thread on this on X overnight. Below are a couple of key excerpts:

Something has broken tonight in the bond market. We are seeing a disorderly liquidation.

If I had to GUESS, the basis trade is in full unwind.

Since Friday’s close to now … the 30-year yield is up 56 bps, in three trading days.

The last time this yield rose this much in 3 days (close to close) was January 7, 1982, when the yield was 14%.

This kind of historic move is caused by a forced liquidation, not human managers make decisions about the outlook for rates at midnight ET. […]

S&P futures are down another 100 points or 2% tonight as I write. This sell-off might not be about tariffs but on the realization that the bond market is broken/breaking.

Markets are fragile. Tariffs broke the bond market and now this decline is about this realization.

The Liquidation Has To Run Its Course

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A liquation is underway and must be completed, losing positions have to be exited, not supported or ignored.

Cutting rates and making financing rates cheaper in the middle of this kind of liquidation, encourages speculation … exactly what is not needed in the middle of such a move.

I think the market knows this which is why the chart below shows only a 63% probability of a cut in rates in a month. Not intra-meeting! Rates cuts are not the answer.

The Fed restarting QE to artificially raise bond prices will only cement the belief that a massive spike in inflation is coming.

This is not a problem that can be fixed with “printing.” It was years of “printing” that encouraged the massive build-up in speculation that is now being forced to liquidate.

You cannot drink yourself sober. You can encourage speculation by cutting rates/WE to stop a speculative unwind.

It’s Probably Not China Selling

I don’t think this is China selling bonds to “punish” the US over rates.

There are no good daily statistics to measure this. But I still contend that if this were happening, the dollar would be declining. The Dollar Index (DXY) is up since Thursday’s low, suggesting net foreign buying is coming into the US market.
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Above said, technically, China could be selling and keeping their money in overnight repo accounts. If they did this, it says two things …

1. They are not afraid to dump Treasuries and drive up yields and punish, but they are afraid to take the cash from these Treasury sales and convert it to another currency (dump dollars). Why is it ok to crush the bond market but not the currency market? (Answer, it does not make sense)

2. If they are selling Treasuries and continue to park them in US repo accounts, they are not really serious about punishing the US.

Again, the most logical answer is that they are not the primary seller of Treasury, if they are a seller at all.

Most Hedge Funds Don’t Hedge–But You Can

If you want to hedge against U.S. Treasury bonds crashing as their yields spike, you can buy optimal puts on the iShares 20+ Year Treasury Bond ETF (TLT 0.00%↑ ).

You can download the Portfolio Armor optimal hedging app by aiming your iPhone camera at the QR code below (or by tapping here, if you’re reading this on your phone). Our app can help you find the least expensive hedges given your risk tolerance and time frame.

Could This Crisis Be A Buying Opportunity?

Possibly, though this almost certainly isn’t the market bottom. But there are a few high quality names that look like pretty good bets now for a rebound by this time next year. If you would like a heads up when we buy one, feel free to subscribe to our trading Substack/occasional email list.

We'll also be looking to add more short exposure, ideally on a relief rally, but we'll probably add some either way this week.