- Treasury Secretary Scott Bessent denied that chaos in the bond market over the deleveraging of so-called basis trades forced President Trump into putting his global trade tariffs on pause for 90 days. Rather, Bessent said, this was Trump’s plan all along.
Treasury Secretary Scott Bessent denied on Wednesday that the president’s decision to pause most trade tariffs for 90 days was motivated by bond market volatility.
Following President Trump’s announcement that most of the tariffs he had planned for US trade partners would now be postponed pending further negotiations, reporters at the White House asked Bessent if a shocking rise in bond yields, which sparked fears of a liquidity crisis and questions about whether Treasuries were losing their safe-haven status, had pushed Trump into a partial retreat.
“This was driven by the president’s strategy,” the Treasury secretary explained. “He and I had a long talk on Sunday, and this was his strategy all along.”
Stocks rose after Trump announced the 90-day pause, during which most countries (except China) will return to a baseline 10% tax on imports. “This was the news we and everyone on the Street [were] waiting for as the pressure on Trump took on a life of its own,” Wedbush Securities analysts Dan Ives and Sam Brandeis wrote in a note Wednesday afternoon. “And the eye-popping rise in the 10-year yield was ultimately too much to hold his line on the self-inflicted Armageddon tariff imposed at midnight. Now we can expect massive negotiations across the board in the coming months, with China at the forefront as the biggest wild card.”
Previously, Bessent predicted that the bond market would calm down as highly leveraged bond trades unwind. He also stated that this level of deleveraging was normal and expected.
A small number of hedge funds profit handsomely from the so-called basis trade, which involves extensive borrowing to capitalize on tiny price differences between Treasuries and futures linked to those bonds. This usually contributes to the smooth operation of the money markets. When the $1 trillion trade is unwound, yields rise as the market struggles to absorb the massive increase in Treasuries’ supply.
In an interview with Fox Business, Bessent stated that he has seen a similar story play out numerous times throughout his hedge fund career.
“There’s one of these deleveraging convulsions that’s going on right now in the markets,” he told me. “It is in the fixed income market. Some very large leverage players are experiencing losses and are forced to deleverage.
Investors initially piled into Treasuries last week as the stock market plummeted following President Donald Trump’s announcement of sweeping “reciprocal tariffs,” which took effect Wednesday morning. Early Monday, the yield on the benchmark 10-year Treasury note fell below 4% for the first time since October, down from about 4.8% in early January. A fixed-income selloff soon followed, however, and the 10-year yield—which rises as the price of the bond falls—surged above 4.5% Wednesday morning before retreating near the 4.4% mark as a successful Treasury auction eased concerns about demand for U.S. debt, per CNBC.
Bessent addressed concerns about chaos in fixed income by saying, “I believe that there is nothing systemic about this. I think that it is an uncomfortable but normal deleveraging that’s going on in the bond market.”
Basis trade could impact mortgages, car loans
Market watchers have proposed numerous explanations for the perplexing bond selloff. As trade policy uncertainty persists, investors may be compelled to simply hold cash, similar to the onset of the COVID-19 pandemic.
Traders are struggling to predict how the Federal Reserve will react if a global trade war results in dreaded stagflation — rising inflation combined with slowing growth. China and other foreign holders of US debt may flood the market with Treasuries in retaliation for Trump’s tariffs.
According to Apollo’s chief economist Torsten Sløk, evaluating market explanations is based on circumstantial evidence.
Nonetheless, he believes the basis trade is the likely culprit. To profit significantly from the tiny arbitrage opportunity, hedge funds must borrow heavily. According to the Financial Times, they may use up to 50 to 100 times leverage, which means that $10 million in capital could support $1 billion in Treasury purchases.
Extreme volatility can make hedge funds vulnerable to margin calls from broker-dealers, according to Sløk.
“It is very, very unusual that you have long-term interest rates going up when the stock market is going down,” he told me. “That’s telling me that there [are] some distressed, forced sellers out there.”
Sløk expressed concern as long-term Treasury yields, especially the 10-year, are used to determine mortgage rates, car loans, and other borrowing costs across the economy.
“You don’t want long-term rates to go up for non-economic reasons,” he explained to me.
To prevent this during the early stages of the pandemic, the Federal Reserve had to purchase $1.6 trillion in Treasuries over several weeks.
The central bank also temporarily eased bank capital requirements imposed following the Global Financial Crisis. Exempting Treasuries and bank reserves from the supplementary leverage ratio allowed lenders to purchase more US debt.
While insisting that the market will remain stable as hedge funds de-risk, Bessent said Wednesday that he wanted to make the change permanent as part of a larger deregulatory push.