US Treasury Market Sees Spike in Yields Amid Trump’s Tariffs
The world’s largest financial market, the US Treasury market, has seen a significant spike in yields following President Donald Trump’s tariffs. According to Apollo economist Torsten Slok, the unwinding of a popular strategy known as the “basis trade” may be to blame for the increase.
The basis trade involves profiting from the price discrepancy between a Treasury futures contract and a bond with similar characteristics. This difference is called the “cash-futures basis.” As the futures approach their expiration date, the difference starts to converge, allowing traders to profit from an arbitrage opportunity.
However, this strategy has grown to roughly $800 billion in size, raising concerns about its potential impact on the financial system. Slok warned that a flood of Treasury bonds hitting the market could tax the capacity of dealer banks to absorb them, leading to disruptions in the repo market and potentially causing significant problems for broker-dealer firms.
The Treasury market is critical in determining interest rates on trillions of dollars in loans, including mortgages. The spike in yields has raised concerns about inflation, with some experts drawing comparisons between Trump’s presidency and that of former British Prime Minister Liz Truss, who faced a historic meltdown in the UK sovereign bond market after introducing a mini-budget.
Despite the uncertainty, US stocks showed resilience on Tuesday, tallying their worst weekly losses since March 2020. The S&P 500 index rebounded after facing its worst week in over three years.
Source: https://www.marketwatch.com/story/heres-the-unsettling-reason-the-worlds-most-important-market-is-getting-hammered-by-trumps-tariffs-1b330ef1