U.S. Treasury yields have swung wildly over the past few weeks; the U.S. 10-year touched a low of 3.87% on April 4^th, lurched to 4.59% on April 11^th and has since settled to 4.38% at time of writing. Short-term rates¹ have also swung in a range of 60 basis points over the same period, while equities have corrected -3% month-to-date and recession risk has risen following the administration’s string of tariff announcements. We believe there are a confluence of factors at play contributing to the rise in yields including policy uncertainty, deleveraging and slowing demand. That said, yields at current levels present a buying opportunity for long-term investors.

Key factors influencing the move in rates include:  

1. Inflationary trade war and Federal Reserve (Fed) policy: Tariff announcements and retaliation are fueling concerns of higher near-term inflation. Recent Fed commentary stress these inflationary risks, suggesting the committee may not cut rates as aggressively as the market hopes.
2. Foreign demand for U.S. treasuries: Treasury bond auctions during the week were mixed with the 3-year auction showing weak demand, while the 10-year and 30-year auction were well received. On balance, there is demand for Treasuries at these yield levels, but it is concerning that long-end yields continued to move higher while the U.S. dollar fell signaling there may have been some softening in foreign demand.
3. Hedge funds deleveraging: The Treasury cash-futures basis trade is an arbitrage trade where basis traders short (sell) Treasury futures and go long (buy) cash bonds. They are betting that the price of cash bonds will rise relative to futures and juice up their profits buy borrowing money (adding leverage) to increase the position size.
   This trade was losing money as yields rose and cash bonds fell in value and given leverage, traders faced margin calls or financing pressures. As losses mounted, traders had to liquidate (sell) their cash bonds to cover losses or meet funding obligations, creating a feedback loop where rising yields create more losses, forcing further selling.
4. Rising term premium: Investors are demanding greater compensation for owning longer dated Treasuries given continued worsening in the U.S. government fiscal outlook. The reconciliation bill moving through Congress, for example, would still add trillions to the already burdensome U.S. debt stock.

As outlined, such a sharp move in rates is typically driven by several factors coming together simultaneously. For investors, the Fed can only conduct monetary policy effectively, if markets are functioning efficiently. Therefore, continued dramatic moves in rates will likely prompt Fed intervention through balance sheet adjustments or establishing a liquidity facility to ensure market functioning as similar actions were taken in previous periods of market stress. 

¹ As measured by the yield on the nominal U.S. 2-year Treasury note.

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