TREASURIES-Benchmark US yield sees biggest weekly rise in decades on tariff turmoil

By Karen Brettell

April 11 (Reuters) - Benchmark U.S. 10-year Treasury yields posted their biggest weekly increase in more than two decades on Friday as U.S. President Donald Trump’s erratic approach to tariffs prompted global market dislocations and forced selling.

Hedge funds and other asset managers offloaded bonds this week after getting margin calls and posting sharp losses from market volatility, analysts said.

Leveraged investors in particular have been hurt by market whipsaws after Trump last week announced bigger-than-expected tariffs on trading partners, but then offered a 90-day pause for most countries on Wednesday.

Rumors of selling, or lack of buying, by foreign investors are adding to concerns over the market.

Lawrence Gillum, chief fixed income strategist for LPL Financial, called it a "perfect storm," with concerns about sticky inflation also part of the move.

"When you start to have investors from retail to institutional to sovereign wealth funds potentially selling bonds just because of the elevated volatility, you know it's one bad story after the other in the fixed income market," he said.

Trump cited volatile moves in markets, including bonds, as a factor behind his about face on Wednesday, saying that people were "getting yippy."

CME Group has also raised its margin requirements on interest rate futures, which "feeds into the market being concerned about the basis trade," said Molly Brooks, U.S. rates strategist at TD Securities.

The unwind of basis trades, a popular strategy where investors seek to profit from the difference between cash Treasuries and futures prices, has been cited as a large factor behind this week's volatility.

The 10-year note yield US10YT=RR was last up 8.6 basis points on the day at 4.478% and reached 4.592%, the highest since February 13. It posted its largest weekly increase since 2001.

Thirty-year bond yields US30YT=RR rose 0.8 basis points to 4.856%. The yields reached 5.023% on Wednesday, the highest since November 2023. They had their biggest weekly increase since 1987.

Longer-dated debt has taken the brunt of this week's selloff on concerns over the long-term U.S. fiscal outlook. Falling bond prices lift bond yields.

The prospect of a retreat by foreign investors as a result of Trump's policies is raising concerns about who would replace them as buyers of U.S. debt.

"There's a question of who comes in and are we able to stopgap it if there's a potential decrease in demand," said Brooks.

Some analysts are also concerned that Trump's policies will erode the role of the U.S. dollar as a reserve currency, and U.S. debt as a safe haven investment.

Short-term yields have held at relatively lower levels than longer-dated debt as traders bet that the Federal Reserve may cut interest rates sooner if tariffs slow the economy.

The interest-rate sensitive two-year yield US2YT=RR rose 10 basis points to 3.947%. The yields reached 4.039% on Wednesday, the highest since March 27 and the biggest weekly gain since September.

The yield curve between two- and 10-year note yields US2US10=TWEB flattened three basis points to 52 points after reaching 74 basis points on Wednesday, the steepest since January 2022. It is the largest weekly steepening move since October 2023.

Strong auctions of 10-year and 30-year debt on Wednesday and Thursday helped stabilize the market somewhat, but many investors remain wary of buying bonds until there is further improvement in liquidity.

“U.S. Treasuries are still considered liquid relative to other asset classes but overall liquidity this week has been on the poorer side as risk appetites of both buyers and sellers have been curbed,” said Phyllis Sim, a U.S. rates trader at financial services firm StoneX.

Analysts say that further deterioration in bond liquidity could prompt the Federal Reserve to step in to improve market functioning.

Boston Fed Bank President Susan Collins on Friday said the U.S. central bank is "absolutely" prepared to deploy its tools if the need arises.

Minneapolis Fed President Neel Kashkari, meanwhile, said that the Fed should intervene in markets only reluctantly and in a true emergency.

Yields dipped only briefly after data on Friday showed that U.S. monthly producer prices unexpectedly fell in March amid a sharp decline in the cost of energy products, with tariffs on imports expected to drive inflation higher in the coming months.

A separate report showed that U.S. consumer sentiment deteriorated sharply in April and 12-month inflation expectations surged to the highest level since 1981 amid unease over escalating trade tensions.