TREASURIES-Longer-dated yields surge on bond liquidations

By Karen Brettell

NEW YORK, April 9 (Reuters) - Benchmark 10-year U.S. Treasury note yields jumped to a seven-week high on Wednesday on what appeared to be large liquidations of the debt, with trading volumes overnight totaling more than four times the average.

A sharp increase in yields during the Asian trading day increased fears that China may be offloading a large portion of its U.S. bond holdings.

“The big rumor of the week is that Asia is liquidating Treasuries. I think that it's probably mostly coming from China's holdings,” said Tom di Galoma, managing director at Mischler Financial Group.

China is the second largest foreign holder of U.S. debt and owned $761 billion in Treasuries as of January. Japan is the largest foreign owner with $1.08 trillion.

BNY flow data through Tuesday showed foreign selling across U.S. Treasuries and U.S. equities, an analyst at the New York bank told Reuters.

Analysts have also pointed to the unwind of basis trades, in which hedge funds and other leveraged asset managers seek to profit from the difference between U.S. Treasury and Treasury futures prices, as a likely driver of the recent selling.

Steven Zeng, U.S. rates strategist at Deutsche Bank, said that he has heard of many stop losses being triggered on basis trades, with the basis, or difference between the cash and futures prices, trading at stressed levels. The move deteriorated on Wednesday morning compared to Tuesday, he added.

The 10-year note yield US10YT=RR was last up 12.8 basis points on the day at 4.388%. It earlier reached 4.515%, the highest since February 20.

Thirty-year bond yields US30YT=RR gained 12 basis points to 4.835% and got as high as 5.023%, the highest since November 2023.

The interest-rate sensitive two-year yield US2YT=RR rose 4.7 basis points to 3.785%.

The yield curve between two- and 10-year note yields US2US10=TWEB surged as the shorter-dated debt remained relatively stable compared to longer-dated debt. It reached 74 basis points, the steepest since January 2022, and was last at 60 basis points.

Di Galoma notes that Treasuries trading volumes in Asia and Europe were around $18 billion on Wednesday, more than four times higher than typical volumes of $3.5 billion to $4 billion.

But the volatility has also left many investors on the sidelines, waiting to see how long the intensifying trade war between China and the United States, which has been blamed as a cause of the selling, will play out.

“A lot of accounts are sitting on the sidelines here trying to weigh the consequences and how long this is going to last,” di Galoma said.

Demand for longer-dated debt is set to face a test with a $39 billion sale of 10-year notes later on Wednesday and a $22 billion auction of 30-year bonds on Thursday.

A solid 10-year auction, were it to occur, could help to stabilize the market, said Thomas Simons, chief U.S. economist at Jefferies.

If the market continues to deteriorate, meanwhile, the Federal Reserve has several tools it could employ to improve market functioning.

These could include loosening the Supplementary Leverage Ratio rule so that large U.S. banks would not need to set aside as much extra capital to hold Treasuries, or a targeted lending program such as the Fed used after the failure of Silicon Valley Bank in 2023 to provide liquidity to banks, Simons said.

Other options include cutting rates, though this would not necessarily send yields lower, or restarting bond purchases, though this option could elevate concerns over bond demand, Simons added.

China will impose 84% tariffs on U.S. goods from Thursday, up from the 34% previously announced, its finance ministry said on Wednesday.

Trump's "reciprocal" tariffs on dozens of countries took effect earlier on Wednesday, including massive 104% duties on Chinese goods. The European Union is also preparing its own retaliatory measures for later on Wednesday.

The Federal Reserve is also due to release minutes from its March 18-19 meeting later on Wednesday.