The consequences of Trump’s game of chicken over tariffs on the US economy — and its markets — continue to be the talking point, highlighting the uncertainty in the air across the world. While chaos over the stock market crash and its subsequent settling down took the centerstage, there’s another part of the US markets that could send ripples far beyond Wall Street: the US bond market.
Bond yields, essentially the return investors earn, are often associated with safety and steadiness. After Trump’s recent moves, the yield jumped to their highest levels in years. As the confidence in the US economy plummeted, the price of bonds fell and the rate the US government had to pay on its bonds rose sharply.
Let’s break it down to understand why it matters and how it could have triggered Trump’s change of mind.
First and foremost: What exactly are bonds?
US Treasury bonds, in essence, are loans made by investors to the US government. The government borrows money, promising to repay it with interest over a set period of time—typically 10 or 30 years. For decades, they have been considered among the safest investments available.
When investors buy them, they trust the US government to honour its debt. But what happens when that reliability starts to show cracks?
In recent months, a dramatic shift in the bond market has unsettled even seasoned investors. The yields on US Treasury bonds, particularly the 10-year bond, have surged from around 3.9 per cent to as high as 4.7 per cent earlier this year, before settling near 4.5 per cent, according to BBC.
Historically, when bond yields rise, it signals that investors are concerned about inflation, rising interest rates, or potential economic instability. So this time investors, nervous about the trade war and the broader economic outlook, started to sell off bonds, which in turn led to rising yields.
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Who is selling these Treasury bonds?
Treasuries are held by a wide range of investors, from individuals to foreign governments. Japan holds the largest foreign share, with over $1 trillion, followed by China with $760 billion, according to The New York Times. The Federal Reserve is also a significant holder.
Recent sell-offs may be due to:
- Investors liquidating bonds to cover stock losses.
- Hedge funds unwinding futures-based trades.
- Fears of foreign governments reducing their holdings in retaliation to US tariffs.
The ripple effect: How does it impact the broader economy?
The movement in the bond market is not just a concern for professional investors on Wall Street. It has far-reaching implications for the broader economy, particularly for ordinary Americans and businesses. As bond yields rise, so do the interest rates on loans, mortgages, and credit.
This, in turn, can make borrowing more expensive for consumers and businesses alike.
For instance, higher mortgage rates could deter potential homebuyers from purchasing homes, leading to a slowdown in the housing market. Similarly, if businesses face higher borrowing costs, they may cut back on investment and expansion plans.
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The stock market is also affected. When bond yields rise sharply, investors often shift money from stocks to bonds for safer returns, causing stock prices to fall.
“If you were an investor, would you want to invest in a country being run like this? The question answers itself,” Joseph Gagnon, a former senior official at the Federal Reserve, was quoted as saying by The New York Times.
Donald Trump’s pullback
On 9 April, Trump announced a temporary halt on planned tariff hikes on most countries, while simultaneously increasing tariffs on China to 125%.
While he seemed comparatively unfazed by the stock market crash, the selloff in these American bonds seemed to have triggered the U-turn move. He even acknowledged that the bond market was causing concern:
“The bond market is very tricky.”
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From mid-February until Trump’s April 2 tariff announcement, the yield on five-year Treasury notes dropped. However, from then to April 9, after he announced the 90-day pause and tariff changes, the yield started to increase. It peaked on April 11, then began to drop again three days later, remaining above pre-‘Liberation Day’ levels.
China: The elephant in the room
China holds a substantial amount of US debt—around $760 billion in US Treasuries, according to The New York Times. Its actions in the bond market could have significant implications for the global economy.
Should China decide to sell off its holdings of US Treasuries, it could push bond yields even higher, causing further turmoil in the financial markets. However, experts cited by the BBC say China is unlikely to take such drastic action, since doing so could hurt its own economic interests.
So what’s next?
The US dollar index has recently fallen to a three-year low, signalling a shift in investor preferences, as reported by The New York Times. A Bank of America survey found that 60 per cent of global fund managers expect further dollar depreciation. Goldman Sachs analysts warned that if tariffs squeeze corporate profits and dampen consumer spending, the strong-dollar narrative could unravel.
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Uncertainty remains over whether the trade war with China will continue to push bond yields higher, or if a resolution will help restore stability. The effects of rising yields on consumer spending, the stock market, and global trade remain key concerns.
“One of the largest issues right now is the uncertainty. With so many fluctuations and little certainty in trade policy, investors are worried, and the Fed struggles to plan a response,” Anastassia Fedyk, assistant professor of finance at UC Berkeley, told Al Jazeera.
For now, all eyes remain on the US bond market—watching to see if stability returns, or if it’s headed deeper into the storm triggered by the President himself.
