There’s a burgeoning problem in USD rates and specifically in Treasurys. This is quickly becoming yet another unignorable elephant in a room full of them.

On the heels of an anomalous Monday trade, the US long-end sold off again Tuesday, despite a swoon in equities, which gave back the entirety of a raucous early rally to close demonstrably lower, weighed down by tariff “D-Day” at midnight. The same tariff headlines — specifically, the White House’s stated intent to move ahead with a 104% tariff on China within hours — appeared to undercut bonds too.

The simultaneous selloff’s concerning, to put it mildly, and not just from a “nowhere to hide” perspective, although that’s certainly part of it. Some worry the arbitrary nature of the USTR tariff calculation last week was the final straw for a world fed up already with Donald Trump’s — and I’ll extend him a courtesy he doesn’t afford anyone else by being a modicum of polite — distasteful approach to implementing an agenda that’d be disruptive enough without the roughshod execution.

Trump’s raising what it’s entirely fair to call existential questions about America’s commitment to the entire post-War project, from the NATO-centric security architecture to the arrangements which underpin dollar-based global trade, finance and commerce. He’s also raising the specter of an illiberal turn in America, where his governing strategy is blueprinted, in some cases outwardly and proudly, on Viktor Orban’s Hungary. And folks, spare me any grief: Trump’s a huge Orban fan and any number of people in his orbit have stated, in no uncertain terms, that Orban’s methods are something Trump could and should try in the US.

On Tuesday morning, I made the modest suggestion that the foreign official sector, and maybe even PMs and domestic hedge funds, should seriously consider the risk that Trump will attempt some manner of restructuring which equates to a haircut, or even seek to impose losses on holders of Treasurys who he perceives to be unfriendly. Here again, readers will spare me any eye rolls: A restructuring tied to Trump’s grievances (i.e., predicated on his overwrought contention that America’s being “ripped off” left and right) is part and parcel of the “Mar-a-Lago Accord” narrative.

Not an hour after I published that piece, a three-year sale (the first of this week’s auction slate) went extremely poorly. I mentioned this in the comments section of the linked debt repudiation article, but just to reiterate, the standout stat was the Direct award, a mere 6.2% against a 19% average. Mercifully, Indirects were 73%, well above the 65% norm which, as Nomura’s Charlie McElligott wrote in a “late night special” on Tuesday evening, at least suggests the overseas bid hasn’t dried up. Still, non-dealer participation was the weakest in ~15 months. That raised the stakes for Wednesday’s $39 billion 10-year sale and Thursday’s $22 billion long bond auction, which have just taken on quite a bit of extra importance.

As alluded to above, this is looking like a problem all of a sudden. The US cash curve’s bear steepening — and aggressively at that — against a decidedly recessionary macro backdrop and into a bear market tape in equities. That’s definitively not what you want from US Treasurys.

The figure gives you some context for the rapidity of this move: 22bps in two sessions. It’s even more dramatic in 2s30s (27bps in two sessions).

“As with the selling pressure in risk assets, we maintain that it is too soon to fade the steepening trend and expect that the weight of the looming auctions and lingering concern that foreign holders of Treasurys are actively unwinding will press the trade even further,” BMO’s Ian Lyngen and Vail Hartman said Tuesday afternoon.

At the same time, alarm bells are going off in all the wrong places, which is to say the places where, when things get dicey, the Fed has to wake up and pay attention, lest they should sleepwalk over a cliff.

Most obviously, swaps’ outperformance is now a headline in its own right. McElligott called it a “cash bond calamity,” and in a note published just after 5 PM, his colleague Ryan Plantz described an “absolutely spectacular meltdown which has many (myself included) continuing to question their sanity as the curve aggressively bear steepens and spreads, basis, etc. fall out of bed.”

“It’s simply a vacuum of liquidity at this point,” Plantz added, noting that the “void in the UST market” stems from buyers’ strike worries “driven by the administration’s aggressive stance on our trade partners.”

And look, not for nothin’, but this is what I was trying to telegraph on Tuesday morning, and also in my aggressive comments from Monday. Trump’s no stranger to playing with fire, but gambling with the exorbitant privilege — which, at the least, isn’t an inaccurate way to characterize his actions — is the financial equivalent of juggling live nukes.

So, yeah. We’ve got a problem here, and by “we” I mean Bessent and the big man have a problem. It might become Jerome Powell’s problem in fairly short order if things don’t calm down. Look at this picture of Scott, and then read on.

Naturally, 3D chess chatter’s pervasive. Some suspect Trump’s doing this on purpose to force the Fed into a Treasury market intervention. For that, you need funding markets to seize — speaking of juggling nukes — and while the consensus is that we’re not there yet, I’d gently note that’s always the consensus right before funding markets seize. Nobody’s like, “Yep, the pipes are frozen solid, but f-ck it, let’s go get some drinks and dances — ‘Dances!‘ —  and we’ll deal with it tomorrow.”

What now? Well, if you see the word “repo” above the digital fold, or the letters “FHLB” arranged in that order, and all capitalized, in a headline on Bloomberg, you’ll know things have gone truly awry, where that means from worse, with an “e,” to worst, with a “t.” In the same note mentioned above, an alarmed Plantz wrote that, “I even uttered the words ‘operation twist’ today.”

Driving it all home, McElligott flagged “nascent” jitters about a durable correlation flip that finds stocks and bonds selling off together across multiple sessions.

“Some are beginning to worry that a ‘stocks down and Treasurys down’ trade [is] a potential read-through” from the foreign real money crowd “voting with their feet and diversifying reserves and investments away from USD assets,” he said. “If UST duration is no longer working as your tariff-induced, growth-scare risk-off hedge in equities, we are looking at some fresh problems for investors left with few places to hide.”