Key Highlights:
- U.S. 10-year yields surged to 4.22% amid market turmoil, influenced by trade issues, currency fluctuations, and geopolitical tensions.
- Ole S. Hansen, from Saxo Bank, identified this change in long-dated Treasuries as a potential indicator of significant market distress.
- Jim Bianco disputed claims of foreign selling, suggesting instead that the dollar’s strengthening reflects domestic inflation-induced selling, rather than a global flight from Treasuries.
Monday’s trading session proved to be one of the most turbulent since the onset of the COVID-19 pandemic, as global markets became entangled in the economic clash between the U.S. and China over tariffs, with neither country willing to compromise. This volatility affected all asset classes, causing dramatic swings in prices, including Bitcoin’s fluctuations of up to 10% during the trading day. However, primary attention remains on the U.S. 10-year Treasury yield, considered the benchmark for risk-free rates, which the Trump administration aimed to reduce while attempting to refinance a substantial national debt of trillions.
The yield plummeted from 4.8% to 3.9% after President Trump intensified trade tensions with comprehensive import tariffs, which in turn raised the appeal of Treasury notes.
Typically, bond prices increase and yields fall during heightened market risk. Paradoxically, on Monday, as risk aversion grew, yields escalated to 4.22%.
This rise was not limited to the U.S.; the U.K. witnessed its most notable yield increase since the Liz Truss-era pension crisis in October 2022, with global yields climbing, indicating rising instability and dwindling confidence in sovereign debts and currencies.
Ole S. Hansen remarked on social media, “U.S. Treasuries faced a significant sell-off yesterday, with long yields experiencing the most considerable rise since the tumult during the pandemic. This could indicate that large holders of Treasuries, including foreign investors, might be liquidating their assets.” Hansen detailed, “The 30-year U.S. Treasury benchmark experienced a rise from approximately 4.30% to nearly 4.65%, while the 10-year note surged to 4.17% from a preceding low of 3.85%.”
Although Hansen implied foreign selling as a cause, especially from China, Jim Bianco contested this viewpoint. He asserted, “No, foreigners were not divesting Treasuries to retaliate against the U.S. (Trump).” Bianco emphasized a remarkable rally in the Dollar Index (DXY), which observed a 2.2% increase over three days, countering the notion of foreign stakeholders leaving the U.S. market.
“If China or other foreign entities were indeed selling Treasuries, they would need to convert those dollars into a different currency; otherwise, retaining the funds in a U.S. bank serves no purpose. If significant enough selling affected yields, the consequent dollar sales would have diminished the dollar’s value. Instead, it strengthened more than usual.”
“This indicates that foreign investments are flowing into the U.S., not away from it; the selling was primarily domestic, driven by inflation concerns.”
Despite contradictory information regarding China’s sales, unconfirmed rumors persist. As of January 2025, China still held about $761 billion in U.S. government debt, making it the largest foreign creditor after Japan.
The argument suggesting that the increase in 10-year and 30-year yields resulted from Chinese actions lacks credibility, as most of China’s official investments in dollar-denominated assets are not concentrated in long-duration instruments.
Michael Pettis, an economist and author of “The Great Rebalancing,” has historically emphasized that China’s U.S. Treasury holdings are closely related to its current account surplus and that these holdings cannot be weaponized against the U.S. Unsurprisingly, China has reduced its Treasury investments since 2013, correlating with its current account surplus reaching its apex during the 2008 financial crash.
