Harley Bassman, a pioneer in US Treasury indicators, has warned that a little-noticed feature of the bond market could worsen the ongoing selloff and push yields higher. In his Convexity Maven newsletter, Bassman explained that the sharp rise in yields has made the longest-dated securities the cheapest to deliver under futures contract rules. These securities have higher duration, making them more vulnerable to price drops when interest rates rise.
To offset this exposure, fund managers may sell other long-dated bonds before contracts expire, amplifying selling pressure when prices are already falling. Bassman noted that negative convexity in bond futures has reached levels not seen since 2007 and may have contributed to the latest Treasury selloff. He described a potential 'nightmare scenario' if the 20-year Treasury yield crosses 6%, which could create selling pressure equivalent to an auction of $110 billion in securities.
Currently, the 20-year yield is around 5.6%. Investment managers and leveraged funds using futures for hedging or basis trades are particularly exposed to this risk.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing