The 10-Year Treasury Yield was down to 3.88% only a few days ago; it hit 4.5% last night, and it sits at 4.45% as I start this blog early in the morning.
Both the stock and bond markets have not seen this much volatility (with prices and rates moving up and down repeatedly throughout the day) since the 2008 financial crisis.
What Is Interesting Is the Reason Rates Shot up (China Does Not Sell Treasuries Because It “Wants” To; It Has To)
The primary factors influencing bond investors and thus interest rates are: (1) Inflation expectations, and (2) growth expectations.
But neither of those factors seems to be driving the massive rate increases over the last few days.
Oil prices plummeted to a low we have not seen since COVID, and copper prices plummeted as well – two strong indications that inflation is not on the horizon (per George Gammon).
In addition, Jeff Snider pointed out that TIPS (bonds that move with inflation) are not predicting higher inflation either.
It does not appear to be economic “growth expectations” too that are pushing yields higher, as tariffs are major threats to growth and a major reason why the stock market is getting hammered.
The speculation is that rates are rising because there are so many “forced sellers” of Treasuries in the market (it’s not because tariffs cause inflation).
These forced sellers include hedge funds and major investors facing margin calls, as well as other countries that are forced to defend their currencies.
Hedge funds invest borrowed funds, and they use their investments as collateral for their loans. When that collateral drops in value, hedge funds are forced to bring more cash to the table (because of “margin calls”), and often the only thing they can sell to get more cash is Treasuries.
It is similar with other countries too, as they are often forced to sell their Treasury holdings to raise dollars to buy imports, to service dollar-denominated debts, and/or to buy up their own currency to maintain its value.
So, when we see politicians complaining about China “dumping Treasuries” to push up American interest rates or to “manipulate their currency,” it’s often nonsense. China and other countries are often forced to sell Treasuries because it is the only way they can access US dollars that they desperately need.
So a major reason rates have shot up so much over the last few days is likely because tens of billions of extra Treasuries were dumped on the market by investors, hedge funds and countries desperate to raise dollars.
This is why we often see rates go up at the front-end of financial crises. It is also why gold prices often fall at the front-end of crises, as investors also often sell gold for similar reasons.
Long story short: I think we’ll see volatility still and rates could remain higher for a while. But once the “forced selling” stops, rates will likely trickle down again, as neither growth nor inflation seems to be on the horizon.
Note: Rates fell 7 bps while I typed this blog, indicating that volatility remains and that the downward trend may already be in play.
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