The US Treasury market – long viewed as the global bedrock of financial safety – is flashing red as hedge funds dump positions en masse, triggering sharp selloffs and prompting fears of a broader liquidity crunch, according to a report by Bloomberg.
Hedge funds employing the popular “basis trade” strategy – arbitraging the spread between cash Treasuries and futures using borrowed leverage – found themselves forced sellers this week as soaring volatility and tightening financing conditions rattled markets.
On Wednesday, the yield on 10-year US Treasuries surged past 4.5% in Asia trading before settling around 4.41%, capping a brutal three-day rout that also pushed 30-year yields above 5%, the steepest rise since 1981. The selloff extended to global bond markets, including Japan, where 30-year government bond yields hit a 21-year high.
“This is beyond fundamentals right now. This is about liquidity,” said Jack Chambers, senior rates strategist at ANZ.
For macro hedge funds running highly leveraged basis trades, the sudden spike in bond yields – triggered by fears over US tariffs and a potential regime shift in safe-haven demand – forced a rapid unwind. With prime brokers hiking margin requirements or pulling back financing altogether, funds had little choice but to liquidate.
The report quotes Mukesh Dave, CIO of Aravali Asset Management, a global arbitrage hedge fund based in Singapore, as saying: “When the prime broker starts tightening the screws in terms of asking for more margin or saying that I can’t lend you more money, then these guys obviously will have to sell.”
The result has been historic dislocation, with the spread between 10-year US Treasury yields and swaps — a key basis trade metric — widening to 64 basis points, the largest on record, a clear sign of distress in the arbitrage space.
While basis trades are normally low-volatility, high-efficiency arbitrage strategies, they can unravel rapidly in volatile environments — especially when policy shocks, such as the sweeping US tariffs announced this week, inject uncertainty into rate expectations and global trade dynamics.
“This is up there with GFC and Covid-level volatility,” said Mark Elworthy, head of FICC trading at Bank of America in Australia. “We would expect to have some central bank response in the near term if markets continue to behave like they have been in the last 12–24 hours.”
Adding to concerns, speculation is mounting over whether foreign holders of Treasuries — notably China — may reduce or sell down US debt holdings in response to trade tensions.
“Markets are now concerned that China and other countries could ‘dump’ US Treasuries as a retaliation tool,” said Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong.
Amid the forced selling, questions are also emerging about the long-term role of Treasuries in global portfolios. Some strategists now believe a regime shift may be underway.
“The UST selloff may be signalling a regime shift whereby US Treasuries are no longer the global fixed-income safe haven,” said Ben Wiltshire, G10 rates strategist at Citi.
For hedge funds, the implications are profound. Many macro and relative value funds rely heavily on basis trades for consistent returns. If funding becomes more constrained or market dislocations persist, strategy performance could deteriorate quickly — and trigger further deleveraging across the space.
