The Crucial U.S. 10-Year Yield is Shifting Unfavorably for the Trump Administration

Monday’s trading session will be remembered as one of the most volatile since the COVID crash in March 2020. Global markets found themselves under pressure as the U.S. and China continued their standoff over tariffs, showing little sign of compromise. Amidst this turmoil, equity markets faced significant fluctuations that affected all asset classes. Bitcoin (BTC) exhibited intraday swings of up to 10%.

The focal point of the situation is the U.S. 10-year Treasury yield, often referred to as the risk-free interest rate. The Trump administration expressed a desire to lower this yield while pursuing the refinancing of trillions in national debt. Following President Donald Trump’s imposition of sweeping import tariffs, the yield dropped from 4.8% late last week to 3.9%, as demand for Treasury notes surged. Typically, bond prices increase when investors adopt a risk-averse stance, leading to lower yields. However, in an unusual turn of events on Monday, yields rose, climbing to 4.22%.

This phenomenon wasn’t isolated to the U.S.; the U.K. witnessed its sharpest rate increase since the Liz Truss-era pension crisis in October 2022, with yields rising globally. This trend suggests increasing instability and waning confidence in sovereign debt and currencies.

Ole S. Hansen, head of commodity strategy at Saxobank, pointed out that the scale of movement in long-dated Treasuries indicated deeper issues might be at play. “U.S. Treasuries experienced a significant sell-off yesterday, with long yields rising the most since the turbulence during the pandemic—possibly signaling that large holders, such as foreign entities, are repatriating their assets,” Hansen noted in a post on X. “The 30-year U.S. Treasury benchmark climbed from lows near 4.30% to as high as 4.65% yesterday, with the 10-year benchmark rising back to 4.17% from a previous low near 3.85%.”

While Hansen pointed to foreign selling, particularly by China, which is rumored to have liquidated $50 billion in Treasuries, Jim Bianco, president of Bianco Research, offered a different perspective. “No, foreigners were not selling Treasuries to punish the U.S.,” he stated, highlighting a sharp rally in the Dollar Index (DXY), which increased by 2.2% in just three days.

Bianco argued, “If China or other foreigners were selling Treasuries, they would need to convert those dollars into a foreign currency. Otherwise, selling Treasuries and keeping the money in dollars in a U.S. bank would be pointless. If they sold enough Treasuries to affect yields, it would have led to a decline in the dollar’s value, yet instead, it rallied significantly.”

This suggests a flow of foreign capital into the U.S. instead of a retreat, with the selling motivation stemming more from domestic concerns related to inflation. Despite varying opinions, unverified reports regarding China’s sales persist. As of January 2025, China is reported to hold approximately $761 billion in U.S. government debt, ranking as the largest foreign owner after Japan.

The narrative that the 10-year and 30-year yields surged primarily due to Chinese actions lacks credibility. Most of China’s official investments in dollar-denominated assets do not focus on longer-duration instruments but rather on agency bonds, shorter-term bills, and bank deposits.

There is a belief that China can leverage its holdings of U.S. Treasury notes during the trade war; however, this may not hold true. According to economist and author Michael Pettis, China’s U.S. Treasury bond holdings are directly correlated to its current account surplus, which cannot simply be weaponized against the U.S. It is worth noting that China has been reducing its Treasury investments since 2013, with its current account surplus peaking during the 2008 financial crisis.