Trump tariffs drove a Treasury sell-off — who sold the safe-haven asset?

The U.S. Treasury market over the past week saw investors fleeing the safe haven, in an unusual move that added to the market turmoil caused by U.S. President Donald Trump’s “reciprocal” tariffs — forcing him to suspend the duties.

In just a few sessions, yield on the 10-year Treasury soared to 4.592% on Friday, the highest since February. Similarly, the 30-year Treasury bond yield notched its highest since November 2023 last Wednesday. While yields have ticked lower since then, they still remain elevated.

Yields rose around 50 basis points in the five days to April 11, according to data from LSEG.

With recession fears mounting and markets remaining volatile, the sell-off in Treasurys was unusual as during times of uncertainty investors generally tend to flock to the safety of U.S. debt. 

The unusual outflow begs the question: who has been selling — and why?

China is America’s second largest foreign creditor after Japan, holding about $760 billion in Treasury securities.

“I think China is actually weaponizing the Treasury holding already,” said Chen Zhao, chief global strategist at Alpine Macro.

“They sell U.S. Treasurys and convert the proceeds into Euros or German bunds. That’s actually very consistent with what happened over the last couple of weeks,” he added. Germany’s bunds had bucked a wider sell-off in long-dated Treasurys last week, with its 10-year yields sliding.

However, others suggest that selling Treasurys will bite China just much as it will hurt the U.S.

A rapid sell-off will drive down the value of the remaining bonds, which means China would incur losses on its own investments, said Michael Pettis, Carnegie’s senior fellow based in Beijing.

“China selling down Treasury holdings would effectively be shooting themselves in the foot,” said Michael Brown, senior research strategist at Pepperstone. China selling down Treasurys will necessitate capital being moved back into Beijing and spark an appreciation in the yuan.

That will be the “precise opposite” of what Beijing is going for, especially at a time when the government is hoping to stimulate the domestic economy and cushion the blow from tariffs, Brown told CNBC.

The role of Japan, the largest holder of U.S. debt, has also been called into question. The policy chief of the country’s ruling party has reportedly emphasized that Japan should not “intentionally” sell its Treasury holdings after an opposition lawmaker floated the idea of using Treasurys as a negotiating tool in bilateral trade negotiations.

One analyst flagged that Japan could actually be the bigger culprit in the Treasurys selloff, rather than China.

“Japan is actually the bigger problem,” said BCA Research’s Garry Evans. More specifically, Japan’s life insurers. 

“It’s all very well for the Japanese government to say, we’re not going to sell U.S. Treasurys, but it’s not the Japanese government that owns them. It’s Nippon life,” he added. 

If these insurers are worried about U.S. policy flip-flopping and want to reduce exposure, there’s “not a lot the government can do.”

The selling could also have been fueled by a combination of European and Japanese pension accounts selling long-dated Treasurys to purchase European fixed income, said Prashant Newnaha, TD Securities’ Asia-Pacific macro strategist.

As the bond sell-off gained pace, hedge funds could have been forced to unwind bond-basis trades, which in turn added more fuel to the selling, said Newnaha. When brokers issue margin calls, funds could have been forced to unwind their positions by selling Treasury bonds to raise cash. 

These basis trades are commonly employed by macro hedge funds and involve borrowing money to buy Treasurys while selling futures contracts tied to these bonds with the aim of profiting off the price differences.

“Bond vigilantes,” a moniker for investors who keep tabs on monetary or fiscal policies that may be inflationary by eschewing government debt or selling them also make the list of suspected sellers.

“The Bond Vigilantes have struck again,” wrote Ed Yardeni, who pointed out that recent market movements were a sign that Trump’s policies were misguided.

On top of hedge funds unwinding on positions, bond vigilantes imposing their fiscal discipline and ensuring that whatever Trump wants to do is put in check likely catapulted in the selling of UST holdings, observed Newnaha.

Monthly Treasury data usually comes with a lag, and the most recent figures released in March are from January. April data is slated to be released only in June. Given the scale of the sell-off and lack of clear and immediate figures, it’s not easy to isolate specific parties driving it and to what degree, market watchers told CNBC.

But undergirding all the conjectures is the perception of diminishing confidence in U.S. policies.

The “incoherent and volatile nature” of policymaking is significantly denting the appeal of Treasurys as a safe haven, said Pepperstone’s Brown.

America’s policy flip-flops with regards to tariffs has undermined confidence in U.S. assets that has led to a weakening in the U.S. dollar which would typically be a beneficiary of investors looking for safe haven assets.

“Should the market’s trust issues with the U.S. administration deteriorate further, then this could be the catalyst for the sell-off to take on its next leg,” said Newnaha.