Large trade seen behind US Treasury yield spike that fueled speculation

A spike in U.S. Treasury yields across the curve in the late morning on Wednesday caused speculation about what was behind the move, and by Thursday greater consensus emerged among market sources that it was triggered by a large trade.

Some traders on Wednesday suggested it could have been a technical error, while others said it may have been due to an interest rate hedge for a corporate bond issue. One U.S. rates trader said the sudden surge in yields may have been due to a “fat finger” mistake, or a typing or input error in the futures market. U.S. Treasury yields on two-year notes to 30-year bonds jumped, caused by what could have been massive selling in the futures market, analysts said.

However, Bhas Nalabothula, head of U.S. Institutional Rates at electronic trading platform Tradeweb, said the yield spike was the result of a large transaction.

“We saw that there was a large pricing in the marketplace – it was not a fat finger incident – and we did see elevated volumes during that time period in our wholesale business,” he said on Thursday.

The U.S. 10-year yield jumped to 4.282%, from 4.225%, or a six-basis-point rise in five minutes, a sharp increase for such a time span.

A U.S. rate strategist speculated on Wednesday that the spike could be attributed to a “rate lock” going through ahead of a corporate bond issue. Wall Street dealers typically look to lock in borrowing costs for deals that they underwrite. As part of that process, a dealer sells Treasuries or Treasury futures, typically in large size, as a hedge to lock in the borrowing cost on the bond issue before the deal is completed.

Tom di Galoma, managing director of rates and trading at Mischler Financial in Park City, Utah, said on Wednesday there was market speculation that someone sold 80,000 contracts in 10-year bond futures, after intending to sell 8,000, after which the trade was speculated to be canceled. “Selling of 80,000 in 10-year futures is massive. It’s like 20 times the size of a normal transaction,” di Galoma said, noting that the average size of 10-year future sales is about 5,000 contracts with a maximum of around 20,000 contracts.

He estimated that the sale of 80,000 contracts was equivalent to between $8 billion and $10 billion, a large sum for one transaction in the $27 trillion U.S. Treasury market.

The episode happened as dealers and hedge funds began hedging for Wednesday’s $42 billion 10-year Treasury note auction. The auction was poorly received and Wednesday’s late morning incident in the futures market could have contributed to the weak outcome.

“We did have volatility early in the day when we had that big spike due to a large selling in the futures market,” said Jan Nevruzi, U.S. rates strategist at TD Securities in New York.

He said that might have caused buyers to pull back at the auction.

Wall Street and global stocks rose on Thursday, as Apple’s domestic investment push, dovish noises on interest rates and a generally upbeat earnings season trumped chip stock hits and the arrival of the U.S. tariff day.

The day’s diary is topped by a likely Bank of England interest rate cut and U.S. weekly jobless numbers that take on unusual importance in light of last week’s July payrolls confusion.

* Stocks in Asia and Europe pushed higher even as U.S. tariffs were introduced, with Shanghai’s index hitting its highest since 2021 following above-forecast Chinese import and export numbers for July. Although eight major trading partners accounting for about 40% of U.S. trade flows have reached framework deals to reduce tariffs to 15% or less, imports from Brazil, India, Switzerland and Canada face rates of 35% to 50%. Though, Taiwan and South Korea are breathing sighs of relief following exemptions from 100% chip import levies.

* Expectations for Federal Reserve easing as soon as next month were buoyed again as two regional Fed chiefs - Minneapolis Fed boss Neel Kashkari and San Francisco’s Mary Daly - indicated more rate cuts were coming this year. President Donald Trump said on Wednesday he would likely appoint a temporary replacement to Adriana Kugler’s vacant Fed board seat. Meanwhile, candidates to replace Chair Jerome Powell next year are likely down to three, including former Fed Governor Kevin Warsh and White House adviser Kevin Hassett.

* Fed easing speculation knocked the dollar back to 10-day lows, with Treasury yields remaining close to the week’s three-month lows despite another underwhelming 10-year auction overnight and a long bond sale later today. Sterling was slightly firmer against the dollar but down on the euro, as the BoE looks set to lower British rates by a quarter point to 4% later today.

Make sure to check out today’s column, where I argue that investors looking for the impact of Trump’s tariffs are looking at the wrong earnings season.

Today’s Market Minute

* President Donald Trump’s higher tariff rates of 10% to 50% on dozens of trading partners kicked in on Thursday, testing his strategy for shrinking U.S. trade deficits without massive disruptions to global supply chains, higher inflation and stiff retaliation from trading partners.