BONDS from Australia to Japan swung after a turbulent day for US Treasuries, as markets rapidly unwound bets on interest-rate cuts in the wake of American President Donald Trump’s surprise pause on tariffs.
Policy-sensitive bonds in Australia and New Zealand plunged while longer-tenor debt rallied, echoing the flattening of the yield curve in the US. The moves came after two-year Treasuries, considered particularly sensitive to rate expectations, surged as much as 30 basis points (bps) during the previous session before a sharp reversal.
Turmoil in Treasuries can lead to volatility across global markets as traders look to the world’s biggest debt market for clues about borrowing costs and economic growth. In the past week, gyrations in US government bonds raised fears of a financial dislocation reminiscent of the worst of the pandemic era.
Yields on US 10-year Treasuries dropped as much as 8 bps to 4.26 per cent in Asia trading hours on Thursday (Apr 10), after jumping as much as 22 bps at one point on Wednesday. Those on two-year Treasuries were down around 3 bps at 3.88 per cent.
“This period of instability will continue for the next couple of weeks,” said Tsutomu Soma, a bond trader at Monex in Tokyo. “No one knows what shape these tariffs are ultimately going to take, and everyone’s looking at US yields to trade – so brace for more chaos ahead.”
Australia’s three-year bond yields surged on Thursday by the most since September 2022. New Zealand’s two-year yields jumped 9 bps. Japan was an outlier, with its longer-end bonds facing the most selling pressure: 10-year Japanese government bond yields rose 13 bps to 1.4 per cent at one point.
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Amid the on-again, off-again whiplash of Trump’s tariffs, investors are facing an increasingly complicated task trying to figure out how shifts in global trade will impact the twin levers of growth and inflation – both important drivers of rate expectations.
“The big fear is an undercutting of confidence in the US bond market,” said Leonard Kwan, a money manager at T Rowe Price in Hong Kong. “So much of what we do, so much of global financial markets historically, is dependent on the Treasury market as (a) benchmark.”
The recent movements in the Treasuries market have fuelled speculation among traders about who has been selling. Some investors are worried about a blow-up of the basis trade, where hedge funds profit from the difference between futures and spot prices.
US Treasury Secretary Scott Bessent has said large leveraged players are being forced to cut their positions. Another theory is that central banks are cutting their holdings of Treasury bonds.
But whatever the ultimate cause, market participants say volatility in the world’s biggest bond market is far from over. Trump’s 90-day pause on his biggest tariffs for most countries – with China being a notable exception – means traders are bracing themselves for a period of prolonged negotiations that could weigh on markets for months.
“The volatility is here to stay,” said Charu Chanana, chief investment strategist at Saxo Markets. “In fact, it will only get more pronounced as we get through a series of negotiations now.” BLOOMBERG
