Markets for U.S. treasury securities sent a warning message Wednesday morning as fears rose about President Donald Trump’s tariffs and stock volatility continued. 

Yields on 10-year treasury securities rose to 4.36% as of midmorning. 

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Why would traders care that yields rose on 10-year treasury securities? 

It is a sign of trouble that treasury yields would rise as stocks and other assets are cratering. 

To back up, the market for 10-year treasury securities, debt instruments issued by the U.S. government, is among the deepest and most important in the world. Many other rates, such as mortgage rates, are tied to the 10-year treasury. Treasury securities are used as collateral in all kinds of other trades and are key to regulatory requirements for banks and other institutions. 

Treasurys are considered a “safe haven” asset. Debt issued by the treasury is assumed to be essentially risk-free. Investors can turn to the treasury market for safety when they worry about stocks and other assets.

An increase in the demand for treasury securities should push the price up. Simultaneously, yields would fall because bond yields move in the opposite direction from bond prices.

Instead, yields are rising. That’s a sign that demand is falling, which is worrisome. 

It’s a sign that something is really wrong — either in terms of panic or in the financial system’s plumbing. 

Why would demand for treasury notes be down? 

It’s unclear exactly what is happening in treasury markets, but a few theories have been floated.  

One possibility is that traders speculate that China or another major holder of U.S. debt, such as Japan, will sell off some of its treasury holdings. 

For example, Chamath Palihapitiya, a prominent venture capitalist and Trump supporter, tweeted Tuesday that he heard that China was dumping treasury securities as part of its retaliation for the tariffs imposed by Trump. 

Such a move would be extreme and self-harming for China, though, as it holds about $760 billion in treasury debt.

Another is that hedge funds, under broader pressures from the market downturn, are selling treasury securities to exit a trade, referred to as the basis trade, in which they bet on the cash price of Treasurys versus the price in futures contracts. It’s a complicated arrangement, but the bottom line is that some hedge funds place highly leveraged bets on Treasurys to exploit very small differences in pricing in the market.

Treasury Secretary Scott Bessent seemingly endorsed this interpretation of the market Wednesday, saying that the developments were the result of “some very large leveraged players” unwinding trades but that it was “nothing systemic.”

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What comes next? 

If there are no broader systemic problems in treasury markets, then fears should subside in the coming days as investors assess the effects of the trade disruptions caused by Trump’s tariffs. 

But if there is some serious problem in the market, it is possible that at some point, the Federal Reserve would step in to purchase treasury bonds to prevent failures of systemically important financial institutions. It did so in the spring of 2020 when the COVID-19 pandemic caused massive selloffs on Wall Street. There’s been no indication so far, though, from the Fed that it is worried about market functioning.