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US government bonds recorded their worst month in four years as investors warned the world’s most important debt market was in the grip of a “vicious loop” of selling.
Yields on the 10-year U.S. Treasury jumped more than half a percentage point in September to 5.3 percent, putting them at the highest level since 2007 and within a whisker of levels last seen in 2002. The scale of the move is unusual for a $32 trillion market that serves as an anchor for global finance.
The selling, initially driven by concerns about U.S. government debt and inflation, has now triggered waves of selling by funds, according to large investors and traders. They said a feedback loop set in this week: Yields rose to levels at which some funds were forced to sell Treasuries, triggering new waves of bond sales that drove up borrowing costs.
“It’s this vicious loop. And you have to wonder what’s going to break it,” said Priya Misra, portfolio manager at JPMorgan Asset Management.
“This may continue for a while,” she added. “No one wants to get in front of the freight train.”
A report released Wednesday showing that inflation in personal consumption expenditures, the Federal Reserve’s preferred price gauge, remained steady at 3.4 percent in August while expectations of an increase to 3.7 percent did little to placate investors.
Treasury Secretary Scott Bessent’s August decision to increase his department’s Treasury purchases also failed to curb sales.
U.S. borrowing costs have risen since the start of the Iran war in February as a sharp rise in energy costs has worsened inflation, which is toxic for bonds that pay fixed interest streams over years. The borrowing spree of big AI companies, strong forecasts for U.S. economic growth and U.S. government debt surpassing $40 trillion also played a role in rising yields.
But now technical factors also play an important role.
Among the top forced sellers of long-term Treasuries this week are hedge funds and real estate investment trusts, which hold large portfolios of mortgage-backed securities, said Matthew Scott, global head of trading at AllianceBernstein.
He added that as borrowing costs rise, Americans are becoming increasingly reluctant to prepay their mortgages. For investors holding mortgage-backed securities, this extends the time it takes to pay off mortgages, and so they must give up other long-term debt such as Treasury bonds to compensate for this change.
Similar dynamics are occurring in other segments of the market, such as a rebalancing of portfolios by leveraged funds with large positions in the Treasury futures market, said Amrut Nashikkar, an analyst at Barclays.
Daniel Gottlander, head of North America swaps trading at Citi, echoed this sentiment.
“When you see these sell-offs, you’re going to have to reduce risk in other parts of the portfolio. That’s why it’s all happening at once. There’s a lot of ripple effects,” he said.
Although these effects are typical of a selloff, there are usually investors willing to step in and buy bonds at cheap prices, which can stabilize the market. That’s not the case, Gottlander said, “the marginal buyer hasn’t shown up yet.”
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