Speculation of Chinese Retaliatory Selling Amid Hedge Fund Margin Calls... US Treasury Yields Surge

On the 9th, the yield on U.S. Treasury bonds, which are considered safe assets during stock market crashes, surged, drawing attention to the background. While many analyses suggest that hedge funds facing liquidity crises are securing cash, there is also speculation that China is selling U.S. Treasuries.

Speculation of Chinese Retaliatory Selling Amid Hedge Fund Margin Calls... US Treasury Yields Surge On this day, the yield on the 10-year U.S. Treasury bond jumped to 4.516% per annum, up 0.362 percentage points from the previous trading day. Due to the U.S.-China trade war, funds had flocked to the safe asset of Treasury bonds, lowering the yield to 3.886% on the 7th, but it jumped 0.6 percentage points in just two days. The two-day increase is the largest since March 2020 during the COVID-19 pandemic.

The poor U.S. Treasury auction was the trigger for the selling trend. On this day, the U.S. Treasury Department auctioned $58 billion worth of 3-year Treasury bonds. The bid-to-cover ratio was 2.47 times, below the previous month's average of 2.7 times. Matthew Scott of asset management firm AllianceBernstein pointed out, "The poor performance of the 3-year auction is sure to reinforce rumors that foreign investors are withdrawing from the U.S. Treasury market."

In the market, there is an analysis that hedge funds, which have fallen into a liquidity crisis due to the stock market crash, are rapidly selling the Treasury bonds they held as collateral. The Financial Times (FT) reported that major U.S. banks are demanding additional collateral from hedge funds.

Wall Street believes that hedge funds are liquidating arbitrage trades that exploit the price difference between Treasury futures and spot prices. During the U.S. Treasury sell-off in 2020, this kind of arbitrage liquidation was one of the main causes.

There is also speculation on Wall Street that foreign countries, including China, might be selling off U.S. Treasuries. The timing of the U.S. Treasury yield surge coincides with the U.S. imposing reciprocal tariffs on China. China's holdings of U.S. Treasuries amount to $760.8 billion, second only to Japan.

Reporter Kim In-yeop inside@hankyung.com