Investors are baffled as U.S. Treasuries sink for the third consecutive day, and yields continue to rise across the curve, defying a long-standing market pattern during periods of stress. This is fueling speculations and concerns as the one safe haven during times of crisis now seems to be losing its luster.
What Happened: On Tuesday, the former CEO of bond giant PIMCO, Mohamed A. El-Erian shared what he called an “interesting observation” by Mike Bird, an editor at The Economist, on X.
The only other times when the S&P 500 (INDEXSP: .INX) dropped more than 10% within 4 days, and two-year treasury yields dropped less than they have now was during the bear markets of 2011 and 2015, when “interest rates were already at zero,” Bird wrote, before adding that it is “really stark just how much of a bind that Fed is in.”
The 2-year note that yielded 3.9% on the day that tariffs were announced, now yields 3.78%, a 0.12-point drop, which pales in comparison to other periods in recent history when equity markets faced a similar rout.
Yields have continued to spike since this was posted, with the 10-year note now yielding 4.40%, up 55 basis points over the past 48 hours, and the 30-year treasury notes, on the other hand, hit 5% late last night, before retreating to 4.90%.
Why It Matters: Long-term rates are now considerably higher than they were on Liberation Day last week, meaning that they are now of no help in servicing the government’s massive debt burden.
X has since been abuzz with chatter that this is China dumping its US Treasury holdings, which stand at over $760 billion. Venture capitalist Chamath Palihapitiya commented on the platform on Tuesday “I'm hearing they are dumping [U.S. Treasuries] to try and move rates to shift narrative and make our upcoming Treasury auctions more expensive.”
Goldman Sachs Group Inc. GS analysts believe that the appeal of U.S. assets is eroding among foreign investors, before adding that “foreign officials have taken a number of actions to attempt to reduce their reliance on the dollar,” reported Reuters.
Mark M. Zandi, the Chief Economist at Moody’s Analytics told ResiClub, a newsletter on the U.S. housing market, that he suspects the sharp rise in yields is due to “hedge funds selling treasury bonds to raise cash to meet margin calls on their equity holdings.”
Other prominent voices have since piled on, with the renowned Peter Schiff mincing no words as usual when tweeting about this just a few hours ago.
Schiff stated that “Without an emergency rate cut tomorrow morning and the announcement of a massive QE program, tomorrow could be a 1987-style stock market crash.”
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