The $29 trillion U.S. Treasury market is reeling as hedge funds unwind an estimated $1 trillion basis trade, driving long-term yields to multi-decade highs and amplifying global financial volatility. The 10-year Treasury yield hit 4.44% on April 9, up 20 basis points from April 7, while the 30-year yield topped 5%, marking the steepest one-day jump since 1981, per Bloomberg data. This turmoil, sparked by rising borrowing costs and President Donald Trump’s April 7 announcement of 104% tariffs on Chinese imports, is rippling across markets from bonds to Bitcoin.
Basis Trade Breakdown
The basis trade hinges on exploiting price gaps between Treasury bonds in the cash market and their futures contracts. Hedge funds buy the cheaper cash bonds and sell futures, aiming to profit when prices converge—a strategy scaled to $800 billion to $1 trillion, according to Apollo Global Management and Bloomberg estimates. Leverage, often 50 to 100 times capital via the repo market, turbocharges returns but heightens risks. A $1 billion position at 50-to-1 leverage becomes a $50 billion bet; a 2% price drop wipes out the initial capital.
This week, repo rates rose to 5.2% from 4.9% last month, per Federal Reserve data, eroding profitability and forcing funds to liquidate. The resulting Treasury sell-off and scramble to cover futures positions pushed the MOVE index, a volatility measure, to 140—its highest since October 2023.
Tariff Trigger
On April 7, Trump threatened 104% tariffs on Chinese goods via Truth Social, demanding China retract its 34% counter-tariffs by April 8. When China held firm, the White House confirmed the 104% rate on April 8, effective 12:01 a.m. ET today, April 9, per CNN and Reuters. The move—building on earlier 20% and 34% tariffs—stoked inflation fears, shattering Treasuries’ safe-haven status. The 10-year yield surged 20 basis points on April 7 despite a 2% S&P 500 drop, a rare divergence noted by Reuters. China, holding $760 billion in Treasuries (2.6% of the $29 trillion market), may be selling in response, though Treasury data lags and offers no confirmation yet.
The sell-off has gone global, with German 10-year bund yields rising 15 basis points to 2.3%, per Bloomberg, as markets brace for trade war fallout.
Wider Market Strain
The unwind’s impact is spreading. Bitcoin fell 3% to $75,000, with CoinDesk warning of a drop to $73,800 if leveraged positions unravel further. The Dow shed 1.5% on April 8, and rising yields pushed mortgage rates toward 7%, per Freddie Mac. “This is a liquidity crunch with sharp teeth,” said Rishi Mishra of Futures First Canada.
The $29 trillion Treasury market—marketable securities supporting the broader $36 trillion U.S. debt—faces mounting pressure. In 2020, a basis trade unwind dumped $173 billion in Treasuries, prompting $1.6 trillion in Fed intervention. Today, the 30-year swap spread hit a record low of -94.89 basis points, per Columbia Threadneedle’s Ed Al-Hussainy, signaling acute distress.
Regulatory Watch
The SEC’s 2025 mandate for central clearing of Treasury trades aims to curb such risks, but the current unwind has sparked calls for immediate action. Bloomberg Intelligence’s Tim Magnusson labels the stress “modest” versus 2020, tying the yield spike more to tariffs than a trade blowup. Still, Hedgeweek and X posts suggest hedge funds expect Fed bond-buying if losses deepen.
Outlook
As of April 9, Treasury sales since April 7 total $50 billion daily, per market sources, with no clear end in sight. Yields could climb further if foreign holders accelerate sales, though some X traders note stabilizing futures volumes as a possible turning point. The collision of leveraged bets and Trump’s tariff escalation has left the Treasury market—and global finance—teetering, with investors and regulators on high alert.
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