Payden & Rygel: US 30-Year SOFR minus 30-year Treasury Bond Yield
A bad take, we say. First, China owns Treasuries that are mostly inside of five years. Second, short-term Treasuries rallied, showing more demand for U.S. assets rather than a flight. So, what bedeviled the long bond? Hedge funds had bet that the spread between 30-year SOFR swaps and 30-year Treasuries yields would widen, meaning yields would rise and swap rates would fall (spreads are quoted as swap rates minus Treasury yields).
The rationale was twofold: a smaller fiscal deficit means less Treasury issuance (supply), and bank deregulation frees up balance sheet for more Treasuries (demand). Either would widen the spread, but neither happened. Instead, the spread narrowed, hedge funds unwound the trade by selling 30-year Treasuries, with leverage amplifying the move.
Don't believe all the stories used to explain market moves.
