US President Donald Trump’s tariff initiatives have disrupted global financial markets.
While Trump’s trade offensive has sent stocks on a rollercoaster ride, the turmoil in the bond market — especially the simultaneous decline in bonds and stocks — is what worries economists the most.
What is a bond?
A bond is an investment in which its buyer gives a loan to a government or company for a specific period.
As a return on investment, the buyer will receive interest paid at a specific interest rate on a regular basis in addition to the original investment principal on the predetermined date of the bond’s maturity.
While government bonds typically offer lower returns than stocks, they are widely regarded as one of the least risky investment options.
Bonds issued by the U.S. Treasury are particularly favored by investors and are considered safe-haven assets because they are backed by the world’s most powerful governments and top economies.
Since U.S. Treasuries have a reputation as a safe asset during times of economic turmoil, their prices often rise as stock prices fall. Depending on the length of maturity, U.S. Treasury bonds also include categories such as “Treasury bills,” “notes,” and “bonds.”
The price and yield of US Treasuries move in the opposite direction – the lower the price of the bond, the higher its interest expense.
What has happened recently in the bond market?
On April 2 this year, when Trump announced comprehensive tariffs on dozens of U.S. trading partners, investors began selling off U.S. Treasury bonds with longer maturities in large numbers, causing their yields to rise sharply.
Despite the U.S. stock market plunge, the sell-off still occurred, contrary to the usual pattern of investors flocking to buy safe-haven assets.
On Friday, the 10-year Treasury yield peaked at 4.58%, compared to less than 3.9% a week ago.
The sell-off in U.S. Treasuries is widely seen as a serious warning sign for the U.S. economy, as it shows investors’ doubts about Washington’s ability to repay its debt over the long term.
Amid market turmoil, Trump announced last Wednesday that he would suspend most “reciprocal” tariffs for 90 days.
If left unchecked, rising U.S. Treasury yields could snowball into an economic crisis.
Rising yields make it more expensive for the U.S. government to borrow and repay its national debt, increasing the risk of default. It should be noted that the total amount of U.S. Treasury bonds currently exceeds $36.22 trillion.
Rising yields have also raised the cost of borrowing and paying off debt for citizens and banks, whose balance sheets are critical to the health of the financial system as a whole.
“I think this is a very worrying indicator,” Anastasia Fedick, assistant professor of finance at the Haas School of Business at the University of California, Berkeley, told Al Jazeera.
“Investors do not necessarily expect the U.S. government to be unable to repay its debt in the short term, but investors face a lot of uncertainty about the direction of the U.S. economy.”
The bond market can influence government policy, and this has been well proven.
Former British Prime Minister Liz Truss resigned in 2022 just 49 days after taking office, largely due to a sudden surge in the country’s bond yields after she implemented a tax-cutting microbudget.
Announcing the 90-day tariff pause, Trump admitted that people were “a little uneasy” about the bond market.
Trump said, “The bond market is very tricky.”
What will be the next step for the bond market?
Although US Treasury yields have fallen since Trump’s change of attitude, US Treasury yields remain high compared to recent weeks as the US president’s trade war trajectory remains uncertain.
Trump launched an investigation into imports of semiconductors and pharmaceutical products on Monday, April 14, which may be a precursor to a new round of tariffs, while he also hinted at a possible suspension of tariffs on the automotive industry.
Since last week, the Trump administration has imposed 145 percent tariffs on China, and the fate of the “reciprocal” tariffs facing dozens of countries remains unclear after the 90-day moratorium he announced.
“There is still a lot of uncertainty and the market situation is quite fragile. ”
“What happens when the 90-day moratorium ends? How will the trade war with China develop? In terms of bonds, China is the second-largest foreign holder of U.S. Treasuries, so it could strategically sell partially if the situation escalates. ”
In an interview with Bloomberg TV on the 14th, U.S. Treasury Secretary Scott Besent downplayed the possible impact of selling U.S. Treasury bonds and refuted the claim that the U.S. status as a financial safe haven may be at risk.
Bescent said the U.S. Treasury is “still far away” from the moment it needs to act, but it has a “robust toolbox” that includes options to expand its debt repurchase program.
“The Fed has tools that can help it stabilize the situation, such as through quantitative easing — buying more long-term U.S. Treasuries, as we saw at the beginning of the pandemic,” Fedick said. ”
“I think one of the biggest problems right now is uncertainty. Trade policy is too volatile and uncertain, not only for investors to worry, but also for the Fed to formulate a response policy. ”