This report analyzes the structural dislocation observed in the U.S. Treasury market between March and April 2025, including rising yields, widening hedging costs, and the collapse of swap spreads. While surface indicators like EUR/USD strength and declining MOVE Index suggest normalization, underlying funding markets—especially FX-based USD liquidity channels—continue to show acute stress. By examining key structural indicators such as the cross-currency basis, swap spreads, auction tails, and yield vs. fair value gaps, we demonstrate that elevated yields are less a reflection of inflation or policy expectations and more a consequence of impaired market structure. We argue that timing bond entry points should be based not on price alone, but on structural conditions—namely, whether there exists real, willing, and capable buyers.
1. Research Background and Problem Statement
1.1 The recent surge in U.S. Treasury yields during March–April 2025 cannot be fully explained by rising inflation expectations or Fed policy. In fact, nominal 10-year yields exceeded the sum of real yields (TIPS) and expected inflation (BEI) by over 80 basis points at their peak.
1.2 This report proposes that this dislocation stems primarily from three structural sources:
- (a) deterioration in foreign investor participation,
- (b) rising FX hedging costs,
- (c) growing imbalance between physical Treasury and derivatives market demand.
1.3 To assess these hypotheses, we analyze five key indicators: cross-currency basis, swap spreads, the MOVE Index, auction tails, and the divergence between nominal and fair-value yields.
2. FX-Based Funding Mechanics and Basis Spread Distortions
2.1 European and Japanese institutional investors generally fund U.S. Treasury purchases through FX swaps, borrowing dollars against their home currencies. The premium paid to access dollars through this mechanism is quantified as the cross-currency basis.
2.2 As of April 18, 2025, the 3-month EUR/USD basis stood at –8 basis points, significantly below the theoretical Covered Interest Parity (CIP) level of –1bp. This suggests that market participants—particularly in STIR (short-term interest rate) and repo markets—are paying a dollar premium beyond what is justified by interest rate differentials. This indicates a shortage of structural USD funding.
2.3 While EUR/USD exchange rates appear to be strengthening (suggesting euro demand), the underlying reality is more complex. Capital repatriation from U.S. equities and bonds has driven nominal EUR demand. However, behind the scenes, European financial institutions still face severe USD funding gaps—leading to heightened stress in the FX swap and dollar repo markets.
3. Swap Spread Collapse and Derivatives Market Preference
3.1 The swap spread, defined as “10Y Treasury yield minus 10Y swap rate,” reflects the relative attractiveness of physical bonds versus synthetic interest rate exposure. A negative spread indicates a structural preference for derivatives.
3.2 As of April 18, 2025, the 10Y swap spread collapsed to –47bp, down from –20bp just ten trading days earlier, and far below the historical mean of –5bp.
3.3 This decline reflects the following cascading dynamics:
- Basis deterioration → Repo margins contract → Leveraged players unwind Treasury positions
- Primary dealers face balance sheet constraints → Forced liquidation of long-term bonds
- Demand shifts to synthetic exposure via swaps → Treasury market loses marginal buyers
- Structural demand dries up → Swap spreads spiral downward
3.4 The extreme inversion of swap spreads is not a mere technicality—it signals a broader erosion of confidence in the Treasury cash market, where market participants are fleeing towards more liquid and margin-efficient synthetic alternatives.
4. Fair Value Assessment: Nominal Yield vs. Economic Justification
4.1 As of April 18, 2025:
- 10Y Nominal Treasury Yield: 4.33%
- 10Y Real TIPS Yield: 2.12%
- 10Y BEI (Breakeven Inflation): 2.21%
→ Implied Fair Value Yield = 2.12% + 2.21% = 4.33%
4.2 Compared to March levels (4.59% nominal vs. 3.76% fair value), the yield gap has closed significantly due to:
- –26bp drop in nominal yields
- +61bp rise in BEI
- –4bp drop in real rates
4.3 Thus, while yields have normalized from over-discounted levels, this alone does not justify aggressive buying unless structural demand conditions also recover.
5. Treasury Auction Metrics and ETF Reactions
5.1 The April 16 auction of 10Y Treasuries delivered:
- Bid-to-Cover: 2.67 (Above average)
- Auction Tail: ~0.3bp (Indicates stable demand)
5.2 However, market response was subdued, as evidenced by:
- TLT: –0.87%
- TMF: –2.84%
- ZROZ: –1.60%
5.3 This divergence suggests that while the primary auction attracted nominal interest, actual market participants—especially ETFs and leveraged accounts—remain structurally cautious, reflecting shallow underlying demand.
6. MOVE Index Signals: Less Panic, But Not Yet Stability
6.1 The MOVE Index fell from 134 in March to 114.64 as of April 18—a 15% decline.
6.2 However, it remains above the long-term threshold of 100, which historically aligns with structural market bottoms. In 2018 and 2020, the MOVE Index broke below 100 approximately 1–3 weeks before sustained recovery in Treasury prices began.
7. Structural Bottom Checklist and Portfolio Allocation Framework
7.1 We propose that 3 out of the following 4 indicators must be met to confirm structural bottoming:
| Indicator | Threshold | Historical Avg at Bottom | Current (Apr 18) | Status |
|---|---|---|---|---|
| EUR/USD Basis | ≥ –5bp | –4bp | –8bp | ❌ |
| 10Y Swap Spread | ≥ 0bp | +3bp | –47bp | ❌ |
| MOVE Index | ≤ 100 | 98 | 114.64 | ❌ |
| Auction Tail & Dealer Share | ≤ 1bp + Declining Dealer Role | 0.6bp | 0.3bp | △ |
7.2 Portfolio Execution Plan (Example):
If targeting a 10% allocation to TLT:
- If 2 indicators are met → initiate 30% of position
- If 3 indicators are met → add 30%
- If 4 indicators are met → finalize remaining 40%
8. Conclusion and Policy Implications
8.1 Despite improving surface indicators—normalizing yields and falling MOVE—the deeper structure of the Treasury market remains impaired. USD liquidity constraints, persistent swap spread inversion, and derivative market concentration all point to an unresolved structural mismatch.
8.2 Investors should focus not on whether “yields look attractive,” but whether there is a viable funding and demand structure to support large-scale Treasury purchases. This requires triangulating between FX funding conditions, derivatives market stress, auction dynamics, and ETF behavior.
Final Message:
Without structural repair, entry is not an opportunity—it’s a risk.
Don’t predict. Track the structure.
HOHO-ECONOMICUS Insight 
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