According to Shankar Ramakrishnan and Davide Barbuscia from Reuters, a recent sell-off in the U.S. Treasury markets may have been exacerbated by corporate plans to borrow nearly $190 billion in the bond market this month. Bankers and analysts suggest that this poses a risk for markets that is likely to persist throughout the year. Companies have been engaging in pre-issuance hedges by short selling Treasuries in anticipation of their bond offerings, in order to protect against future interest rate increases. This has added pressure on Treasury yields and introduces a new element to the market’s focus on bond yield trajectory for the year.
As yields have been rising in the $28 trillion Treasury market since September, driven by factors such as growth expectations, inflation, bond supply, and potential policy impacts, companies have been actively hedging their future bond issuances in recent weeks. This was particularly noticeable in January, with $127 billion in new corporate bonds issued in the first 16 days alone. Market experts anticipate heightened volatility in Treasury markets this year, partly due to uncertainty surrounding President-elect Donald Trump’s policies.
Pre-issuance hedges are typically not publicly disclosed until later, making it difficult to gauge the full extent of this activity. However, analysts have observed a significant impact of these hedges on Treasury yields, with the benchmark 10-year Treasury bond yield rising from 4.38% to 4.8% in mid-January amid corporate issuance activity. The Commodity Futures Trading Commission’s data also shows an increase in dealers’ net short positions on 10-year Treasury futures, reaching a record high in early January.
Overall, syndicate bankers are anticipating around $1.65 trillion of new investment-grade bonds in 2025, making it one of the most active years for such offerings. The influence of pre-issuance hedges is expected to continue affecting Treasury markets as companies juggle their borrowing needs and market dynamics.
During the first eight days of 2025, the U.S. Treasury conducted auctions for 3-year, 10-year, and 30-year bonds consecutively, generating over $100 billion in proceeds. Simultaneously, various companies issued approximately $79 billion worth of investment-grade bonds.
“The Treasury bond markets were poised for a significant sell-off,” remarked Guneet Dhingra, the head of U.S. rates strategy at BNP Paribas.
(Reporting by Shankar Ramakrishnan and Davide Barbuscia; Editing by Paritosh Bansal and Anna Driver)
