Overnight, U.S. stocks halted their sharp decline, but Wall Street's nightmare is far from over. Hedge funds are aggressively selling off their U.S. Treasury holdings, leading to the largest single-day increase in the 10-year Treasury yield in nearly three years.
On Monday during U.S. trading hours, U.S. Treasuries faced severe selling pressure, with the 10-year Treasury yield soaring by 19 basis points to 4.18%, marking the largest single-day increase since September 2022. The 30-year Treasury yield rose by 21 basis points, the largest single-day fluctuation since March 2020.
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The rise in yields means a drop in bond prices. U.S. Treasuries, as ultra-low-risk assets, typically perform well during market turmoil. However, the decline in the $29 trillion U.S. Treasury market overnight reflects that hedge funds are reducing leverage and investors are flocking to cash to avoid market volatility.
<h2>Panic Deleveraging: Hedge Funds &#34;Desperately Running Away&#34;</h2>
On Monday, media reports indicated that hedge funds utilizing the small price differences between U.S. Treasuries and related futures contracts (i.e., those engaging in &#34;basis trading&#34;) are massively liquidating their positions.
These funds are major players in the fixed income market, and their actions to reduce risk positions have triggered a wave of selling in U.S. Treasuries. Gennadiy Goldberg from TD Securities described this trend as a &#34;sell everything, everywhere, all at once&#34; trade. He added:
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Hedge funds are trying to deleverage, and there is a 'sell everything' trade in the market.
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One hedge fund manager candidly attributed the yield fluctuations to basis trading, while noting that the broader scale of hedge fund selling is &#34;destroying&#34; the liquidity of U.S. Treasuries, high-grade corporate bonds, and mortgage-backed securities.
<h2>Where is the Safe Haven? The Entire Industry is Flocking to Cash Assets</h2>
The selling spree is not limited to hedge funds. The entire investment community is selling U.S. Treasuries to raise cash, with one fixed income trader specifically pointing out the actions of traditional asset management firms.
Ed Al-Hussainy, a senior interest rate analyst at Columbia Threadneedle, stated:
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I believe investors are turning to cash and cash-like assets to cope with this market volatility. The simplest explanation for the rising yields is that investors are selling what they can sell and then hunkering down. Selling stocks now would lock in losses, so the easiest way to obtain cash is to sell U.S. Treasuries.
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Although the stock market has temporarily halted its sharp decline, investor confidence remains extremely fragile, and market liquidity is evaporating at an alarming rate.
In this storm, there is no truly safe haven, and even U.S. Treasuries, considered risk-free assets, are not immune

The overnight decline in the $29 trillion U.S. Treasury market reflects hedge funds desperately cutting leverage and investors flocking to cash to avoid market volatility

- U.S. Treasury bonds faced significant selling pressure, with the 10-year yield rising 19 basis points to 4.18%, marking the largest single-day increase since September 2022.  
- Hedge funds are aggressively reducing leverage, leading to a widespread sell-off in U.S. Treasuries and other fixed-income securities, as investors seek cash to navigate market volatility.  
- Despite a temporary halt in stock market declines, investor confidence remains fragile, and market liquidity is rapidly diminishing, leaving no safe haven even for traditionally low-risk assets like U.S. Treasuries.

The US stock market has only stopped the sharp decline, but US bonds have collapsed, and hedge funds are "desperately fleeing."