Bonds crater, 10-year yield briefly spikes above 4.5% in confounding move that’s worrying Wall Street

The bond market — not a plunging stock market — is the talk of Wall Street Wednesday with prices tumbling and yields spiking, unusual action during times when fears of a recession are growing and fixed income is usually relied on as a safe haven from turmoil elsewhere.

The 10-year Treasury yield jumped 11 basis points to 4.37% and at one point overnight climbed above 4.51%. The yield has rebounded beyond where it was the day before President Donald Trump’s tariff plan was unveiled last Wednesday and is currently at the highest since February. As recently as last week, the 10-year yield, which helps decide rates on mortgages, credit card debt and auto loans, was below 3.9%.

The 30-year Treasury yield hit a high of 5.02% overnight, a level not seen since November 2023. The 2-year Treasury yield rose 2 points to 3.76%. One basis point is equivalent to 0.01%. Yields and prices move in opposite directions.

Trump’s next set of tariffs kicked in overnight, including a total rate of 104% on Chinese imports. China then retaliated early Wednesday, further embroiling the globe in trade turmoil.

As Trump has started this trade fight with the world, equity prices have tumbled, with the S&P 500 losing 12% in only four sessions on growing worries he has triggered a recession.

A market sell-off and rising economic downturn fears would normally cause investors to clamor into bonds for safety, driving yields lower. But that hasn’t happened.

The iShares 20+ year Treasury Bond ETF (TLT), a proxy for long-term bond prices, is down more than 6% this week.

“Perhaps even more alarmingly, U.S. Treasury markets are also experiencing an incredibly aggressive selloff as we go to press, adding to the evidence that they’re losing their traditional haven status,” Henry Allen, vice president and macro-strategist at Deutsche Bank, said in a note.

Traders are looking at a number of theories to explain the move, including forced selling by hedge funds getting margin calls to more troubling speculation of foreign holders dumping U.S. government bonds.

A 10-year bond auction looms later Wednesday where the Treasury will seek to sell $39 billion. This follows a 3-year Treasury note auction Tuesday that saw weak demand. The largest holders of Treasurys — and potential bidders in these auctions — are Japan, China and the U.K., the very countries the U.S. has targeted with some of the highest tariffs.

“This is a trade war and if countries can use their stock of U.S. financial assets that they’ve accumulated … then they can create some problems,” said David Zervos, chief market strategist at Jefferies, on CNBC’s “Worldwide Exchange” Wednesday.

Countries may have no choice but to own fewer U.S. government bonds if Trump is successful in shrinking our trade deficit as we will be sending less money overseas for goods. That’s means less money for countries to buy Treasuries.

The move higher for yields is trouble for both the Trump administration and the Federal Reserve. The White House for a time could have taken solace that the tumultuous tariff rollout was at least lowering rates, providing a buffer for consumers. But then rates rebounded this week.

“Trump administration officials have been taking credit for the recent drop in bond yields and mortgage interest rates,” wrote Ed Yardeni of Yardeni Research in a note Tuesday evening. “Unfortunately, the 10-year Treasury bond yield is up.”

“Why is this happening? Fixed-income investors may be starting to worry that the Chinese and other foreigners might start selling their US Treasuries,” added Yardeni.

Meanwhile, the Fed may be hesitant to cut rates with tariffs around the world raising inflation. Its hand may be forced if rates continue to spike and recession fears grow.

Even so, while a rate cut could impact short-term rates, it could backfire and fuel a bigger spike in long-term rates as traders speculate a looser Fed will lead to more inflation over the long term.

— With reporting by Sawdah Bhaimiya.