Source: Cailian She
Author: Xiaoxiang
Following our earlier article mentioning the "trillion-dollar US Treasury debt landmine" (basis trade liquidation) being completely triggered, the US Treasury sell-off further intensified during the Asian trading session on Wednesday...
Market data shows that the 30-year US Treasury yield has directly surged "above 5", dramatically spiking 25 basis points to 5.010% intraday, reaching the highest level since the end of 2023.
The 10-year US Treasury yield, known as the "global asset pricing anchor", rose 21 basis points to 4.503%.
According to Jim Bianco, founder of the renowned research institution Bianco Research, the 30-year Treasury yield has risen 56 basis points in less than three trading days since last Friday. The last time yields rose this much in three days was on January 7, 1982. However, at that time, Treasury yields were as high as 14% (56 basis points was not significant then). Bianco stated that this historic market movement is clearly caused by forced liquidation.
This round of US Treasury plunge has completely deviated from normal market fluctuations. Industry insiders are currently focusing on two main speculations: ①How significant is the impact of the US Treasury basis trade explosion? ②Are overseas "creditors" actually selling US Treasuries?
Regarding the US Treasury basis trade explosion topic, we have comprehensively explained it in our earlier article, which investors can review.
The well-known financial blog website zerohedge has also summarized the potential context of evolving events:
①Trillion-dollar US Treasury basis trades are exploding, with numerous funds and banks potentially liquidating;
②Liquidity in the system is far from sufficient;
③The impact of insufficient liquidity could sweep through all markets, causing stock market crashes (liquidation panic), bond market collapses (sustained yield maintenance), and forex hedging (yen surge... and at some point, a turning point will arrive, with severe US dollar shortage);
④Investors may encounter a critical liquidity exhaustion event in the next two days (Wednesday's 10-year Treasury auction, followed by Thursday's 30-year Treasury auction). If the system lacks sufficient liquidity, we might see an unofficial auction failure - yes, while a complete failure is impossible - primary dealers with the obligation to purchase unsold government bonds will provide a backstop, but if primary dealers' allocation reaches 40% or 50%, it would almost be equivalent to an auction failure.
Zerohedge believes that the results of these two Treasury auctions in the next 48 hours and whether the Federal Reserve will intervene urgently may be the most crucial moment for the US financial system in modern history.
Nomura rates trader Ryan Plantz also warned in an internal memo, "In the Treasury market, swap spreads and basis trades are melting. The US Treasury market is experiencing a massive liquidation unprecedented in my career, and a liquidity vacuum has formed."
According to Plantz, the Federal Reserve must now intervene, although Powell may be reluctant to appear as if he's rescuing Trump's trade war, but he may have no choice.
[The translation continues in the same manner for the rest of the text, maintaining the specified rules for specific terms like Block, HT, BAL, AR, PLA, and KAS.]Sosnick stated that in this situation, the U.S. Treasury would have to issue bonds at higher interest rates to make up for losses: "Supply won't decrease quickly, right? But you must take measures on demand."
Currently, Japan, the largest "foreign creditor" of the United States, has stated that recent U.S. bond sales are not its doing—Japanese Finance Minister Katsunobu Kato on Wednesday ruled out the possibility of using U.S. Treasury bonds held by Japan as a bargaining chip in negotiations against Trump's tariffs on Japanese imports.
