The Curve Strikes Back
The recent market turbulence sparked by Trump's tariffs and China's retaliatory measures has triggered a dramatic steepening of the US Treasury curve, with the 2s30s spread widening from approximately 85bps on Monday to an intraday high of 125bps this morning. Most notably, the 30-year yield briefly surpassed the psychologically significant 5% threshold.
The magnitude of the Treasury sell-off echoes the market dislocation witnessed during the pandemic period, though it has not yet necessitated central bank intervention. These moves—affecting what are widely regarded as the world’s safest assets—reflect a confluence of investor concerns. Chief among them is the fear that the US administration’s confrontational trade policy could usher in stagflation: the toxic mix of stagnant growth and persistent inflation, which would significantly constrain the Fed’s policy flexibility (as we discussed yesterday).
Adding to the pressure is a widespread “dash for cash,” as investors rotate out of longer-dated securities in favour of shorter-term, more liquid instruments. Ironically, the ample liquidity of US Treasuries—usually a stabilising force—has exacerbated the sell-off, as their ease of sale has made them a primary source of quick capital.
Perhaps most troubling is the growing risk of a “buyers' strike” from heavily tariffed nations such as China, the second-largest foreign holder of US sovereign debt.
Despite concerns over US creditworthiness, foreign investors continue to favour US markets over domestic alternatives that lack comparable depth or yield. Japanese investors may temporarily repatriate funds amid concerns about capital losses and yen appreciation, should the dollar weaken. However, with Japanese 10-year bonds yielding just ~1.25% versus 4.35% on their US counterparts, any such move is unlikely to be sustained. Likewise, European investors might momentarily shift into relatively stable assets like German Bunds, but their ~2.61% yield on 10-year debt still lags well behind US offerings.
Today’s 10-year Treasury auction will serve as a critical gauge of investor sentiment, particularly following yesterday’s lacklustre 3-year sale. The upcoming 30-year auction on Thursday adds another layer of importance to this week’s issuance calendar.
While near-term volatility remains elevated, the current dislocations present compelling opportunities. Higher Treasury yields offer attractive entry points for yield-focused investors, while the steepened curve creates tactical positioning advantages across the maturity spectrum. Despite the upheaval, the unparalleled liquidity, depth, and transparency of the US Treasury market ensure its continued primacy in global finance. For investors with the conviction to endure short-term turbulence, today’s market may offer rare opportunities in an asset class that, for all its challenges, still has no equal in scale, security, or accessibility.
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