What’s Driving the Recent Bond Market Volatility? A Look at Basis Trades and Market Structure

The recent swings in Treasury yields caught the attention of many in the financial community—and for good reason. While rising yields often reflect shifting expectations around inflation, Fed policy, or supply/demand dynamics, some of this month’s moves suggest there was more going on beneath the surface.

After reviewing several market commentaries and connecting with colleagues across the industry, I wanted to share a few observations. I’m not a trader and certainly not claiming to have all the answers—but having lived through the early COVID market disruption in 2020, some of the recent patterns felt familiar.

In early April, the 10-year U.S. Treasury yield falls then slightly rebounds to 4.37%, as illustrated in the one-year trend chart.

In early April, the yield on the 10-year U.S. Treasury initially dropped as equity markets sold off—but that classic “flight to safety” behavior didn’t stick. Typically, when equities fall, bond prices rise as investors seek the relative safety of Treasuries, driving yields lower due to the inverse price-yield relationship. This time, however, yields quickly rebounded and have since stabilized across much of the curve in the high 3% to low 4% range—with the 10-year hovering just below 4.40% at the time of writing. The deviation from the usual pattern suggested something else may be at play.

One dynamic that appears to have contributed to the recent volatility is the unwinding of so-called “basis trades.” These are highly leveraged arbitrage positions that take advantage of pricing discrepancies between Treasury bonds and their corresponding futures contracts. While the mechanics may seem technical, the scale is anything but—these trades are estimated to account for $800 billion to $1 trillion in exposure across the ~$27 trillion Treasury market.

In calmer markets, these strategies tend to operate quietly in the background. But when volatility picks up—especially if repo rates rise or Treasury prices fall sharply—these trades can come under pressure. Because they’re often leveraged 25-30x, even modest price movements can trigger margin calls or forced selling, which further amplifies volatility.

We saw a similar pattern unfold in March 2020, when the Fed ultimately stepped in with a $1.5 trillion liquidity injection and followed with nearly $3 trillion in bond purchases to stabilize funding markets.

Of course, basis trades weren’t the only factor at play. Around the same time, there was also speculation about foreign central banks selling Treasurys in response to escalating trade tensions and shifting currency dynamics, as well as weaker-than-expected demand at recent Treasury auctions.

Markets have since bounced somewhat, potentially helped by a softening in tariff-related rhetoric. And while yields have stabilized for now, upcoming auctions and continued geopolitical developments could influence the path forward.

It’s an evolving situation, but one worth watching—particularly for those of us active in the credit and capital markets space. And maybe one day, Michael Lewis will write the definitive account of how all this played out.