Over the past few weeks, the bond market has done what many of Donald Trump’s opponents have failed to do. It has forced the American president into a partial retreat on tariffs, after a rout in US government debt threatened to spill over into a financial calamity.
Analysts and fund managers say the Treasury sell-off was primarily powered by a retrenchment of investors from the US government bond market, fearful that tariffs would fuel inflation and unnerved by what some say is an increasingly erratic administration that has antagonised allies and imperilled the country’s own economy.
However, many stress that the turmoil was also exacerbated by highly leveraged hedge fund strategies. These “relative-value” trades usually seek to take advantage of often tiny differences in prices between Treasury bonds and various derivatives contracts linked to them. Using short-term funding markets to borrow extreme amounts of money, they can transform small profits into large ones.