The unusual surge in long-term Treasury yields has rattled investors in the aftermath of President Trump’s tariff-fueled “Liberation Day” — and the catalysts behind the turmoil could have a ripple effect across the entire financial ecosystem.
As of Wednesday afternoon, the 10-year yield (^TNX) jumped another 12 basis points to trade around 4.38%, even as Trump announced a 90-day pause on reciprocal tariffs for a swath of countries and also raised tariffs on China. That represents a massive 51 basis point swing from Monday’s low of 3.87% — and the biggest three-day jump since December 2001.
Following the latest tariff news, the 30-year yield (^TYX) posted more modest gains but still rose 6 basis points after it logged its biggest move to the upside since March 2020 earlier in the week. As of the afternoon, the 30-year yield traded at 4.79%.
Yields and bonds are inversely correlated, meaning higher yields equal falling bond prices.
“The Stock and Bond Vigilantes signal that the Trump administration may be playing with liquid nitro,” Ed Yardeni, president of Yardeni Research, said in a research note published on Tuesday. “Something may be about to blow up in the capital markets as a result of the stress created by the administration’s trade war. If so, then the S&P 500 will fall into a bear market for sure.”
The bond market serves as a “cash collateral” of sorts to investors who can then borrow money and bet on riskier assets like stocks. It’s also viewed as a safe haven during times of uncertainty, which has been the word du jour as Wall Street remains on edge that shifting trade dynamics could induce a self-inflicted recession.
That’s why the moves in yields have been confusing. As tariff and recession headlines rattle through markets, investors should (in theory) be buying more bonds to protect themselves against surging inflation and deteriorating growth.
Quite dramatically, that hasn’t been the case. So what’s going on?
“Something has broken tonight in the bond market,” market veteran Jim Bianco said late Tuesday in a post on X. “We are seeing a disorderly liquidation. If I had to GUESS, the basis trade is in full unwind.”
The basis trade, a highly levered trading strategy most often used by hedge funds, occurs when traders attempt to profit from a small price gap between Treasury futures and actual government bonds.
The basic idea is to buy the bonds at a cheaper price and “short” the more expensive futures contract with the hope the two prices will eventually merge.
