[NEW YORK] The bond-market sell-off unleashed by US President Donald Trump’s trade war sent 10-year Treasury yields to the biggest weekly surge in over two decades as investors pulled back from US assets.
The scale of the move – with the benchmark’s rate jumping a half-percentage point over the past five days to 4.49 per cent – threatens to deal another blow to the US economy by pushing up borrowing costs more broadly. It also cast doubt on Treasuries’ status as the world’s safe haven as they slid along with the stock market for much of the week, sending investors into other assets such as the Swiss franc, gold and yen.
Ten-year yields, which are a baseline for the cost of mortgages and corporate loans, continued to march higher on Friday (Apr 11), rising another six basis points. That drove it to the largest weekly increase since markets reeled in the aftermath of the 9/11 terrorist attacks.
“This is so scary. We are redefining the risk-free rate of the world,” said Bhanu Baweja, chief strategist at UBS Group. “If you put volatility in the risk-free rate of the world, it will upend every market.”
Trump’s erratic tariff moves have led to wild swings in US government debt over the past week by not only undermining confidence in the economy, but also the direction of US policy and America’s standing in the world. That punctured what was once an aura of exceptionalism around US markets, which in recent years drew in cash from around the world as the stock market soared on the back of the economy’s consistently surprising strength.
But the outlook shifted dramatically after Trump’s latest tariff gambit raised fears on Wall Street that it will send the US into a recession. That – and the unpredictability of Trump’s administration – drove investors to pull back from Treasuries and cast doubt on their privileged status as risk-free securities.
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There has been widespread speculation on whether crucial overseas owners – such as China – may retaliate against Trump by selling some of their securities, which would continue to put upward pressure on interest rates and the US government’s debt bills. Talk has also swirled about blowups in hedge fund trades and an exodus of foreign investors.
“The issue facing the markets is a loss of confidence in US policy,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. “The abrupt changes in tariff policy have caused leveraged trades to come undone and sent buyers to the sidelines.”
The drop in Treasury prices was accompanied by a sharp slide in the dollar, an indication that overseas investors are pulling back from the US.
Investors also flocked to Europe in debt markets to escape the broader turmoil, leaving German yields largely unchanged in the week while the rate US 10-year debt surged more than 50 basis points. That’s the biggest underperformance of Treasuries compared to bunds since at least 1989, according to available data.
“To me, this looks like a buyer’s strike in the Treasury market and unloading of risk going into the weekend,” said Angelo Manolatos, rates strategist at Wells Fargo. “Liquidity has been very challenging.”
Trump and bonds
The surge in yields is sharply at odds with the Trump administration’s stated goal of pulling down long-term interest rates to provide relief to households and businesses. Treasury secretary Scott Bessent laid out the 10-year yield as a benchmark of Trump’s success, predicting it would come down as he reined in the deficit.
Last week, when yields initially dropped as turmoil raced through markets globally, Trump flagged the decline as a sign that “interest rates are down” and reposted a TikTok video that said Trump was intentionally crashing aid debt-saddled Americans.
But as the bond sell-off intensified this week, Trump called off many of his most punitive tariffs even as he kept escalating his conflict with China, threatening to significantly alter trade between the world’s two biggest economies. It provided only a brief respite for Treasuries, which went on to resume their slide.
Some of the retreat was also spurred by worries that the US deficit will swell if the US economy stalls and Trump cuts taxes, as he is already planning to do.
Pressured Fed
The chaos led to a chorus of calls on Wall Street for the Federal Reserve to step in. On Friday, JPMorgan Chase chief executive Jamie Dimon said he expected a “kerfuffle” in Treasuries.
“When you have a lot of volatile markets and very wide spreads and low liquidity in Treasuries, it affects all other capital markets,” Dimon said on an earnings call. “That’s the reason to do it, not as a favor to the banks.”
Others – including strategists at Deutsche Bank, Jefferies and Goldman Sachs Group – earlier this week also started noting that further moves, with yields flirting with a break above 5 per cent, would warrant action from the Fed, though they differed on what officials ought to do.
George Saravelos, Deutsche Bank’s global head of FX strategy, said in a note the central bank should start buying bonds in what’s known as quantitative easing. Jefferies’ Thomas Simons said the Fed may be better off turning to tools it used in past crises, while Goldman Sachs strategists Bill Zu and William Marshall suggested liquidity injections or financial stability purchases. BLOOMBERG
