US Bond Market Decline: Between Deleveraging and Basis Swaps Strategy

Updated

April 16, 2025

Gambar US Bond Market Decline: Between Deleveraging and Basis Swaps Strategy

Jakarta, Pintu News – The U.S. Treasury bond market has been under pressure in recent times. The decline has raised concerns among investors and global market observers. However, according to U.S. Treasury Secretary Scott Bessent, the main cause of this turmoil is not a sell-off by foreign countries, but rather the process of deleveraging or debt reduction by financial market participants.

Deleveraging Seen as Main Cause of Decline

Scott Bessent emphasized that the turmoil in the Treasury market was not caused by a massive unwinding of bond holdings by foreign investors. He mentioned that in the last 10- and 30-year bond auctions, there was an increase in demand from overseas. This, according to him, shows that global sentiment towards US bonds remains positive.

In his statement, Bessent mentioned that the deleveraging process by market participants, especially those using highly leveraged strategies, was the main driver of the price decline. He did not think this indicated a systemic crisis and mentioned that the Treasury Department has instruments to stabilize the market, including bond buybacks if necessary.

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Basis Swaps and Leverage Strategies Trigger Market Tensions

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One strategy that has come under the spotlight in this market dynamic is basis swaps, which are trading the difference between Treasury bonds and derivative products such as futures contracts. This strategy is popular among hedge funds, which use high leverage to profit from the price difference of these financial instruments. However, when markets experience volatility, this strategy backfires.

According to Joseph Brusuelas, Chief Economist of tax consulting firm RSM, the failure in the implementation of the basis swaps strategy was the main cause of the turmoil in the Treasury market. He highlighted that the decline in confidence in the US government’s policies also exacerbated the situation, which then prompted market participants to sell large amounts of bonds to meet liquidity needs.

Economists’ Opinions on Market Direction and Potential Crises

In addition to Scott Bessent, former Treasury Secretary Janet Yellen also stated that highly leveraged hedge funds are the cause of instability in the bond market. She explained that the massive sell-off by hedge funds is part of the forced liquidation process to meet margin calls.

However, not everyone agrees with this view. Economist Larry Summers, who served as Secretary of the Treasury under President Clinton, argues that the US government’s trade tariff policy is the main trigger of a potential crisis in the financial sector. He highlighted that efforts to reduce the US trade deficit worth around USD 800 billion (equivalent to IDR 13.43 quadrillion) also put pressure on the bond market.

Short-term Impacts and Government Mitigation Measures

In the short term, a rise in US bond yields due to heavy selling could cause government borrowing costs to rise. This risks narrowing the fiscal space for the government to finance strategic programs. In addition, volatility in the Treasury market could impact global markets, given that US bonds are considered the safest assets in the world.

The US government, through the Treasury Department, has expressed its readiness to take mitigation measures, including potential bond buybacks from the market to maintain stability. However, Bessent emphasized that there is currently no need for emergency measures, as the market mechanism is still running within acceptable limits.

Conclusion

Tensions in the US bond market illustrate how fragile the stability of global financial markets is to changes in investment strategies and government policies.

Although this condition is considered as part of the normal cycle of deleveraging, the government and market participants still need to be vigilant against potential risk escalation. Policy transparency and readiness of stabilization instruments are key in maintaining confidence in the US financial system.

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