HOHO-ECONOMICUS Insight

U.S. Treasurys: A Bottom May Be Near – A Structural Breakdown Explained for Everyday Investors

U.S. Treasurys are yielding more than euro-hedged Bunds—a rare structural dislocation. This post explains why the distortion exists, what signals mark a true bottom, and how investors can prepare for a high-conviction entry.

HOHO-economicus
3–4 minutes
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Spring 2025 has brought major disruptions to the U.S. Treasury market. U.S. Treasurys now yield more than euro-hedged German Bunds across all maturities. This reversal isn’t just about interest rates—it signals a structural shift in global capital flows.

But in every breakdown lies potential opportunity.
Is this the bottom?
Or is more risk ahead?
This post breaks down the situation step by step, with plain-language explanations and a focus on when, why, and how to consider buying Treasurys—based on Hoho-style structural reasoning.

1. High yields are a symptom. The structure is broken.

On April 16, 2025, the U.S. 10-year Treasury yield reached 4.59%.
This is about 83 basis points (0.83%) higher than its estimated fair value of 3.76%, based on:

  • TIPS real yield: 2.16%
  • Expected inflation (breakeven): ~1.6%

This yield spike didn’t happen because of inflation or Fed policy. It came from structural pressures:

  • Foreign investors pulling back
  • Massive new Treasury issuance
  • Rising FX hedging costs (hedging euro into dollar reduces returns)

In short, Treasurys aren’t paying more because they’re risky—they’re discounted because of a distorted supply-demand structure.

2. The MOVE Index shows fear is peaking

The MOVE Index measures bond market volatility, like the VIX does for stocks.
In April 2025, it hit 134, far above the normal 100 level.

This kind of spike often signals the late stage of a bond sell-off.

If MOVE rises above 140, then drops below 120,
and three consecutive Treasury auctions show tail spreads under 3 basis points,
the market may be forming a structural bottom.

What’s a tail spread?
When the Treasury auctions bonds, investors bid on yields. If the actual yield accepted is much higher than expected, it shows weak demand. That difference is called the “tail.”

3. Demand isn’t gone. It’s shifting.

Foreign investors are leaving.
As of early 2025, China and Japan still hold $1.9 trillion in Treasurys. If they sell more, it could drive yields past 5%.

But U.S. institutional investors—insurers, pensions, and bank ALM (Asset-Liability Management) teams—still want long-term bonds.

If the Fed signals 2026 rate cuts, these buyers will come back. This is not a disappearance of demand—it’s a transfer from global to domestic.

4. The numbers show imbalance

  • FY2025 net Treasury issuance: $3 trillion
  • Q3 issuance alone: $776 billion
  • Primary dealers (big bond underwriters) have limited capacity
  • Foreign demand is down

So supply is rising, but buyers are limited.
That keeps yields high—and creates the conditions for a future bottom.

5. FX hedge costs: Still high, but improving

As of April 2025, the EUR/USD 3-month cross-currency basis is –32 bps.
This means euro-based investors must pay about 1.3% per year to hedge currency risk when buying Treasurys.

A year ago, this cost was 1.8–2.0%, making Treasurys unattractive.
Now it’s lower.
The pressure is easing.
The market is starting to normalize.

6. Four Structural Signals That Mark a True Bottom

When 3 out of these 4 conditions are met, we’re likely near a structural entry point for long-term Treasurys:

  1. Supply-demand balance returns
    • Net issuance < Primary dealer capacity + U.S. institutional demand
  2. Macro trigger appears
    • NY Fed recession odds > 50%
    • Core PCE inflation < 2.5%
    • First Fed rate cut priced within 6 months
  3. Market stress peaks and then eases
    • MOVE Index rises above 140, then falls below 120
    • 3 consecutive auction tails at or under 3 bps
  4. FX hedge costs normalize
    • EUR/USD basis rises to –15 bps or better
    • Annual hedge cost falls below 0.6%

Final Thoughts: Don’t predict. Track structure.

“If foreign selling continues, the 10-year yield could rise above 5%.
But once the stress passes, the vacuum left behind becomes opportunity.”

This is not the moment to buy.
But the bottom may be forming.

Hoho-style investors don’t predict direction. They follow structure.
And structure follows profit and loss.

What to do now

  • Watch: MOVE index, TIC reports (foreign Treasury flows), auction results
  • Measure: Yield vs. fair value, hedge cost trends
  • Prepare: When 3 of the 4 signals fire, begin phased buying

The true bottom in Treasurys is not found in a number.
It’s found in the structure.
And that structure is now shifting.

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