Lessons from the recent US Treasuries sell-off
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In recent weeks, the news of U.S. President Donald Trump's tariffs have caused a lot of instability. For the first few days, it seemed like maybe he was going to try to ride it out, even as markets cratered.

But then there was one market that caused him to blink and pause many of those tariffs. I was watching the bond market. The bond market is very tricky. I was watching it. But if you look at it now, it's beautiful. The bond market right now is beautiful. But yeah, I saw last night where people were getting a little queasy. What Trump's talking about here is the U.S. Treasuries market, the largest bond market in the world. People were selling Treasuries.

And that prompted a lot of fear, a lot of speculation, a lot of concern. Everybody was trying to figure out who was selling Treasuries and why they were selling them. That's Kate Duguid, the FT's U.S. Markets Editor. Kate says this fear was for a lot of reasons. The Treasuries market is how the U.S. government borrows money.

And because our debt is high, the market's huge and connected to lots of other parts of the global economy. So if there's a problem in the treasury market, that immediately ripples out to all other markets, to the stock market, to the corporate credit market. It ripples out beyond the United States. So the problem spreads very quickly. For now, it seems like things have stabilized. But Trump's tariff pause isn't a long-term fix.

Things are much more calm on that front, but it's unclear if they'll remain that way. Certainly some of the issues that we saw come up are going to persist. I'm Michaela Tendera from the Financial Times. In the weeks since the dramatic Treasury market sell-off, Kate has learned a lot more about which investors were at the heart of it.

Today on Behind the Money, we're going to examine what happened and what that tells us about structural problems in the treasury market that really shouldn't be ignored. Hey, Kate, welcome to the show. So glad to be here. Thanks for having me on.

So you've been reporting on the U.S. Treasury market for a while now, about seven years. So what's that typically like? So the thing that we always say about the Treasury market is that it's like the biggest, it's the most liquid, it's the deepest market in the world, right? It's meant to be the super staid asset class where nothing that interesting happens.

That said, like, we have seen a lot of blowups in the market in recent years. There's a lot of funky stuff happening. Like, the market is, like, five times the size it was at the end of 2008. And so, like, as the market has grown...

the problems in it have multiplied and the complexity has sort of multiplied. And so, yeah, we always talk about this as being like a pretty staid, stable market. And that feels like it's just the preamble to talking about whatever crazy thing has happened most recently. Yeah. And we'll get to talk about some of that craziness more in a bit. But I want to focus in on something else you just mentioned, the treasury market size. Right.

It's grown so much. I believe it's about $29 trillion now. So how did we get here? There have been a couple reasons. There were big tax cuts that were implemented by President Trump during his first administration. Then there was spending during COVID to get the economy back on its feet again.

And now what's happening is basically interest rates are much higher than they used to be. And that means the government's payments on its debt have also increased. So the government's spending a lot of money to borrow money. So that all means there's a lot of room for things to go wrong. Before we get into problems that can come up,

It's important to say that U.S. treasuries are usually considered to be a very secure place for investors. These treasuries are typically safe haven assets that investors buy in moments of market turmoil, in moments of geopolitical unrest. And so typically what happens is like you have a big market blow up and investors around the world buy treasuries. So what happened was basically the opposite. And that's a big deal.

As Kate mentioned, trouble in treasuries means trouble everywhere. Now, we didn't enter into a full-on worst-case scenario this time around. Trump's pause on tariffs calmed markets in the short term. But even so, Kate says it's crucial that we understand what took place. It's important to look at what happened to understand what is going to happen next.

It gives us some information about how things will trade in the future. We know a little bit more about how the market will move if we understand how it's moved in the past. And, you know, it may influence future regulation at some point. So now that it's been a few weeks since the big Treasury sell-off, Kate, I know you have a more clear picture of what was happening after Trump's tariff announcement.

So give us the rundown. Who were the main groups selling their treasuries during all this chaos? We saw three big groups selling. We saw asset managers, foreign private investors, and hedge funds. Got it. And how do you know that these were the main groups? So that's something that we can see in some of the data that has been put out. That includes data put out by the Commodity Futures Trading Commission, which

It also includes what we call fund flows, which means data tracking the money going in and out of mutual funds and ETFs. And it also includes data collected by foreign central banks, including the Bank of Japan, places like that. I have to say this is also something that we've heard from investors as the markets team has reported on these issues. And they include asset managers. They include traders. They include hedge funds, high-frequency trading firms.

Okay. So, yeah, now let's go through group by group. I want to talk more about why these groups were selling, what was making them so nervous, and also I want to understand how much of a risk these groups could be in the future if they decide to sell more. So let's start first with the U.S. asset managers. So here we're talking about big groups like Vanguard or Fidelity, that sort of thing, right? Yeah.

Kind of. So big asset managers include, you know, bond funds like BlackRock, PIMCO, JP Morgan. All of these places own a ton of bonds.

And what happened was that part of it was just everybody was selling everything to raise cash. Yeah. How much of a concern was it that asset managers were selling their treasuries, like what you found? It's not a huge structural concern. In these moments, investors are going to be buying and selling. In this instance, it was selling. But for asset managers, it suggests that...

One, they might have been selling things to stay liquid. Everybody was in need of cash. But also, it suggests that they were changing their mind about what's going to happen next in markets. So it tells us that some of the biggest holders of capital in the United States are expecting something different when it comes to interest rates, inflation, and recession. Okay. So let's move on to the second group that you mentioned, the foreign investors. Okay.

First off, though, who are we talking about when we say foreign investors? Foreign investors is a group that includes foreign banks, pension funds, life insurance companies, hedge funds, as well as central banks. So that group owns roughly a third of the entire treasury market.

We know that private investors were selling. Central banks, we don't have evidence that central banks were selling, however. So what was the private investor's motivation to sell? There was maybe a little bit of a loss of confidence in U.S. assets, right? U.S. assets are seen as very stable, as high quality, and...

Part of the issue is that the tariffs, the sort of unruly way or somewhat chaotic way in which they were rolled out, shook a lot of investors. There has been sort of almost what we could call like a stability premium in U.S. assets for a long time. People pay more for U.S. assets because they're seen as very stable. The country is seen as politically stable, economically stable, and people pay for that benefit. Some of that's going away.

So that was also part of what was happening immediately after the announcement. So what does it mean that foreign investors were selling out of their U.S. treasuries? And how much do you see that being a risk in the future? The United States is extraordinarily dependent on foreign investors to buy treasury debt.

Our banks, investors do not have the capacity to buy all of the treasury debt on offer. We need people outside of the United States to buy treasuries.

So alienating our allies, discouraging foreign investors from investing in the United States is something that will hurt the United States and it will hurt the treasury market. It'll mean that there's more debt that U.S. investors have to absorb. It probably means lower prices. It means less liquidity. Yeah, the U.S. would be really screwed without foreign investors in their bond market.

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Take control of the numbers and supercharge your small business with Xero. That's X-E-R-O.

With our easy-to-use accounting software with automation and reporting features, you'll spend less time on manual tasks and more time understanding how your business is doing. 87% of surveyed U.S. customers agree Xero helps improve financial visibility. Search Xero with an X or visit Xero.com slash ACAST to start your 30-day free trial. Conditions apply. So, Kate, now let's talk about this third group, hedge funds.

Who are we talking about here? Why were they selling? What were they doing? So hedge funds have played an increasingly important role in the treasury market since 2008. And the thing about hedge funds is that the way that they invest is by borrowing a lot of money.

So, you know, one of the things that we talked about before is that the market has grown, is five times the size it was back in 2008. And so we need people, we need investors in the market to be buying and selling treasuries. And hedge funds have stepped in and played that role. But they've also introduced a huge amount of leverage into the market that didn't exist before. And what that means is that in moments of crisis, right?

They are sometimes forced to sell a bunch of treasuries really quickly, step back from the market themselves. And that tends to lead to big, big, big moves in price very quickly that can spook people. It can lead to a sort of like rush out the door and can create bottlenecks in the treasury market. So how are they doing that, creating the bottlenecks?

So, bottlenecks in the treasury market can happen a bunch of different ways, not just because of hedge funds. You know, that's a big problem in the treasury market, period. Hedge funds employ all kinds of strategies across the treasury market, but two in particular were of interest to us this time around. One is called the basis trade, and nobody actually knows the size of it, but it's somewhere between $800 billion and $1 trillion, probably. Okay.

And that trade, it's a little complicated, but basically hedge funds are betting on the difference between two similarly priced things. Is it like an arbitrage? Can we say that? Yeah, exactly. That is exactly right. Hedge funds are exploiting small, small differences between very similar assets.

We should note that even though there was a big unwind in the basis trade, this wasn't the main driver of the sell-off. And it has, you know, it's a trade that is a bit of a boogeyman. Like it has been behind a lot of big meltdowns in the treasury market. But it wasn't this time. There was a big sell-off, but it was orderly. The other big trade that we were seeing was on interest rate swaps.

And that was actually extremely interesting because it was this bet that the Trump administration would cut bank regulation. And so banks would be able to buy a lot more treasuries. That capacity dried up during the meltdown. So hedge funds had to close out the positions, the interest rate swap positions very quickly.

So have there been any efforts made to better regulate these hedge funds as they've become a larger piece of the market? Yes, there have been a number of different efforts. Under the Biden administration, a couple different laws were passed, two that would have affected hedge funds. One would have placed hedge funds under more regulatory scrutiny.

And the other would have forced them to hold more cash. You know, hedge funds are traditionally not places that have a lot of cash on hand. They make money by borrowing money. And so this would affect the amount of money that they were able to make. The SEC argued that both of these rules would have made the market more stable, especially in times of crisis. Mm-hmm.

And what happened with those? So one of the rules, the one that would have forced hedge funds to register as broker-dealers and have increased the amount of regulatory oversight, that one has been scrapped. And then the other one, which is called the central clearing rule, is still alive. But the most recent development is that Wall Street has asked for a little bit more time to implement it.

Okay, so now we understand who was selling large amounts of treasuries, which sent markets spiraling.

But what were some of the systemic issues that you noticed during this event? So there weren't actually big systemic issues that came up this time. Even though the sell-off was huge, it was relatively orderly. It went well. We got lucky this time. But there are still these existing structural problems that you alluded to in the market that have caused problems in the past. We know that the market is huge today.

We know that it is under-regulated and we know that it's chock full of leverage. Okay. So what are some of the fixes for those flaws? Would more regulation help this? Yeah, it could only solve some of it. So part of the thing is that in these moments of crisis, like it makes sense that there is a lot of buying and there's a lot of selling.

And it makes sense that the safe haven status of the dollar and of treasuries was questioned after the announcement of tariffs. That's not something that regulation could have prevented. But regulation could make trading more stable in the market. And so if trades in the market are guaranteed—

That gives people a little bit more confidence if the people engaged in those trades have to have more cash on hand. People have more confidence in the trades and they're more likely to go through as well. But again, like you can't stop people from selling or buying in these moments. And so there will be a certain amount of chaos. But the efforts to stabilize the treasury market have really been to make sure that that selling or the buying happens in an orderly way.

The real thing that would help the treasury market is if it was smaller, if there weren't so many bonds for people to buy. Yeah. I mean, is that something that's even possible, though, reducing the market in size? I mean, would the U.S. just have to cut back how much it's spending?

It doesn't seem like there's a quick way to do that. President Trump really wants that market to shrink, but it's likely that it would require raising taxes, not just cutting spending. And it would also require interest rates to be lower. Given what Trump has said about his policies, despite the fact that he has said that he's very focused on shrinking the deficit,

It doesn't seem that likely given that inflation expectations are high, given the set of policies that he's laid out. Right. Yeah, those different goals don't quite sound like they're aligned. So given all that, Kate, what do you think we can expect for the Treasury's market in the future? Things went pretty well for the Treasury market this time around. That's not necessarily going to be the case next time.

So, you know, we've seen an increasing number of problems appear in the Treasury market in the past, I would say, 10 years. Those structural flaws are still there. That's especially true because the efforts to regulate the market under Biden have mostly been scrapped by the Trump administration. Kate, thanks for coming on the show. Thank you so much for having me.

Behind the Money is hosted by me, Michaela Tindera. It's produced by me, Safia Ahmed, and Katya Kumkova. Sound design and mixing by Sam Giovinko. Original music is by Hannes Brown. Topher Forges is our executive producer. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week. Take control of the numbers and supercharge your small business with Xero. That's X-E-R-O.

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