Turbulent treasuries: why America’s IOUs are rocking the boat

The US Treasury market - long the bedrock of global finance - has lately been on a roller-coaster, overturning decades-old correlations. Most strikingly, the US dollar has weakened even as Treasury yields have risen, a split that defies conventional logic. We have previously warned about the fragility of US debt dynamics (Closing the Gap: Can the US Avoid a Debt Crisis?), and recent events show those concerns are no longer hypothetical. With the market’s plumbing under scrutiny, risk managers must reassess how these swings could hit portfolios and funding plans.

From safe haven to white-knuckle ride

Since Trump’s Liberation Day in April 2025, Treasuries have lurched violently. Ten-year yields jumped more than 50 basis points in a single week while the dollar index (DXY) tumbled - a sharp break from the usual “risk-off” script. Behind the chaos: fiscal uncertainty, shifting Fed expectations and a sudden rethink of US credit risk.

Poor auction results added fuel, with primary dealers forced to mop up weak demand - an omen that the market may be struggling to absorb new supply. At the same time, futures liquidity dried up, magnifying the moves and pushing investors into a scramble for cover.

Why it matters far beyond Wall Street

The smooth running of the Treasury market is a global concern, not merely an American one:

• Government funding - Deep, liquid markets keep US borrowing costs down. Persistent turbulence would push those costs up and strain an already stretched fiscal position.
• Global collateral - Treasuries are the world’s go-to collateral. If confidence falters, repo, derivatives and much else could be knocked off balance.
• Bank balance sheets - Banks hold Treasuries as high-quality liquid assets (HQLA). Market dysfunction could impair regulatory ratios and eat into capital, tightening credit.

In short, if Treasuries seize up, the very plumbing of global finance springs a leak.

Has the dust settled?

Some claim the worst is behind us. New York Fed President John Williams has pointed to resilient short-term funding markets, noting that tools such as the Fed’s reverse repo facility have so far averted a full-blown crisis. Auction demand has steadied and volatility has ebbed from its peaks.

Regulators are also under pressure to calm nerves. The much-criticised Supplementary Leverage Ratio (SLR) - requiring banks to hold capital even against “safe” assets like Treasuries - limits dealers’ capacity to stabilise the market while still providing credit. Markets expect the SLR to be eased in the coming months, part of President Trump’s deregulatory push, and many hope this will give dealers more headroom when the next bout of volatility arrives.

A celebration too soon? There might still be trouble in the wings

Short-term funding markets may have saved the day, but deeper cracks remain. Structural mismatches between Treasury supply and demand persist - echoes of the UK’s 2022 gilt crisis, where leveraged positions and thin liquidity collided to disastrous effect.

Should Treasury liquidity worsen, forced selling could feed on itself and compel the Fed to intervene. The difference is scale: a US upheaval would dwarf anything seen in gilts. And while SLR relief will be welcome, many banks say other rules, not just the SLR, curb their balance-sheet firepower, so the fix may fall short.

Even when markets “normalise”, confidence scars linger. In the UK, after the mini-budget panic, the gilt market resumed trading yet now behaves more like an emerging market: Goldman Sachs finds simultaneous falls in UK stocks, bonds and sterling are now materially more common.

Who’s number is up?

Private-capital risk managers cannot ignore this backdrop.

FX hedging: The breakdown in the dollar-rates correlation up-ends familiar playbooks. Non-USD funds holding USD assets have often skipped hedging because of expensive carry, comforted by a dollar that typically rallies in stress. That safety valve is now in doubt. Since Liberation Day, the dollar’s link to US rates has weakened sharply; if markets take on an “EM” flavour, unhedged assets could be hit by recession-driven write-downs, a weaker dollar and pricier hedging costs.

Funding: Should Treasury strains intensify, banks may tighten lending and raise the price of balance-sheet access. Rising yields hurt banks’ liquid Treasury books, eating capital and potentially shutting off funding channels. Fund-finance desks may not be first in the firing line, but proactive refinancing beats scrambling in a crunch.

Treasury takeaway

In this environment, complacency is not an option. Risk managers must stress-test portfolios for scenarios where Treasury market dysfunction becomes the norm, not the exception.

Treasury turbulence is not a blip; it is a warning. Quick-fix policy tools have calmed nerves, yet structural risks endure. For our clients, this calls for flexibility, rigorous stress-testing and the readiness to act. The days of assuming Treasury-market serenity are behind us.