‘This is Not Normal’: Trump’s Tariffs Upend the Bond Market

 

‘This is Not Normal’: Trump’s Tariffs Upend the Bond Market

 

In the usually steady government bond market, the yield on the 10-year Treasury has risen to about 4.5 percent from less than 4 percent at the end of last week.

 

Joe Rennison Colby Smith

By Joe Rennison and Colby Smith

April 11, 2025

https://www.nytimes.com/2025/04/11/business/economy/treasury-bonds-tariffs.html

 

The bedrock of the financial system trembled this week, with government bond yields rising sharply as the chaotic rollout of tariffs shook investors’ faith in the pivotal role played by the United States in the financial system.

 

U.S. government bonds, known as Treasuries because they are issued by the U.S. Treasury, are backed by the full faith of the American government, and the market for Treasuries has long been deemed one of the safest and most stable in the world.

 

But the Treasury market’s erratic behavior all week has raised fears that investors are turning against U.S. assets as President Trump’s trade war escalates.

 

The yield on the 10-year Treasury, which underpins corporate and consumer borrowing and is arguably the most important interest rate in the world, rose roughly 0.1 percentage points on Friday. The rise added to sharp moves throughout the week that have taken the yield on the 10-year Treasury from less than 4 percent at the end of last week to around 4.5 percent.

 

These increases may seem small, but they are large moves in the Treasury market, prompting investors to warn that Mr. Trump’s tariff policies are causing serious turmoil. It matters to consumers as well. If you have a mortgage or car loan, for example, then the interest rate you pay is related to the 10-year yield.

 

Ten-year treasuries are also considered a safe haven for investors during time of volatility in the stock market, but this week’s sharp rise in yields have made this market unusually perilous.

 

A bond’s yield moves in the opposite direction to its price. So as yields have been rising unexpectedly, investors around the world that hold trillions of dollars of Treasuries are seeing the value of their holdings suddenly decline.

 

Rising yields on the 30-year long bond have also been historic, analysts said. This bond is considered a particular refuge for pension funds and insurance companies, because they have liabilities that stretch into the future, so they need assets that match that.

 

“This is not normal,” Ajay Rajadhyaksha, global chairman of research at Barclays, wrote in a report on Friday. Grappling for an explanation, Mr. Rajadhyaksha pointed to speculation by Asian investors who are selling in response to tariffs, as well as the possible unwinding of highly leveraged bets in the Treasury market. “Whatever the reason, right now, bond markets are in trouble,” he said.

 

The yield on the 30-year Treasury bond rose 0.44 percentage points this week, trading roughly flat on Friday. The movement signaled a sharp shift in demand for the long bond. The Federal Reserve fixes a few very short-dated interest rates that then ripple out across financial markets. But the further away from the Fed’s rates you go, the less impact the central bank has.

 

“Once you get to the long end, they aren’t really in the picture,” said Matt Eagan, a portfolio manager at fund manager Loomis, Sayles & Company. “There are fewer natural buyers in that market. Small changes to supply and demand can lead to big swings.”

 

Typically, the nearly $30 trillion Treasury market is too large to be significantly affected by shifts in buying appetites, analysts said, highlighting just how severe the current moves in the market have been.

 

A measure of volatility in the Treasury market reached its highest level since October 2023.

 

“There has been quite a bit of selling that we have seen,” said Vishal Khanduja, portfolio manager for the total return bond fund at Morgan Stanley Investment Management.

 

Another worrying sign this week has been the decline in the U.S. dollar, which tumbled 0.9 percent against a basket of currencies representing its major trading partners on Friday. Every currency of the group of 10 nations rose against the dollar, further pointing to a move away from U.S. assets.

 

A weaker dollar at the same time as government bonds and stocks are selling off is a rare combination, given the dollar’s role as the global financial system’s safe haven.

 

Despite the monthslong slump in the stock market, which is approaching a bear market, it was the bond market looking “queasy” that Mr. Trump said prompted him on Wednesday to pause the worst of his tariffs for most countries.

 

“The big risk elephant in the room is the Treasury market,” Mr. Eagan said.

 

Officials at the Federal Reserve have acknowledged the recent gyrations, but have not yet appeared too alarmed. Susan Collins, president of the Boston Fed, said markets were “continuing to function well.” There were not “liquidity concerns overall,” she said, though she added that the central bank would “absolutely be prepared” to step in if need be.

 

For investors, the moves echoed the wild price swings from the pandemic-induced sell-off in March 2020 and before that, a bout of volatility in September 2019. Those events spooked investors and prompted rapid intervention from the Federal Reserve to stabilize the market.

 

This time, the Fed is in a trickier position. The inflationary effect of tariffs warrants the central bank keeping interest rates high. But it would be more supportive to financial markets and economic growth to lower interest rates, something the central bank has so far resisted doing.

 

On Friday, a widely watched measure of consumer sentiment fell to its lowest level in roughly three years. Expectations for where inflation will be in 12 months time soared, underscoring the Fed’s challenge.

 

In the meantime, this week’s chaotic implementation, then partial reprieve, on global tariffs, followed up by an escalating trade war between the U.S. and China, has left global investors unsure of relying on the Treasury market, or even the U.S. dollar, as a source of safety and stability.

 

Foreign investors are among the biggest holders of U.S. government debt. Japan is the largest, based on official data, with more than $1 trillion worth of U.S. Treasury debt. The next largest in China, which holds $760 billion of Treasuries, having already reduced its holdings by more than a quarter of a trillion dollars since 2021.

 

“WAKE UP PEOPLE,” Andrew Brenner, a veteran bond trader and head of international fixed income at National Alliance Securities, wrote in a brief email. “THIS IS FOREIGN MONEY EXITING THE TREASURY MARKET DUE TO TARIFF POLICIES.”

 

Some analysts and investors fear that a more rapid pace of selling by foreign investors could push U.S. Treasury yields, and with them U.S. interest rates, even higher.

 

“Picking fights with major trading partners who also finance your debt becomes especially risky with a wide fiscal deficit and no credible plan to rein it in,” Mr. Eagan said.

 

Alternatives around the world are also benefiting. Germany has recently announced plans to invest in its military, financed through new debt. The country’s bond market is seen as Europe’s benchmark and is often compared to the Treasury market.

 

As concerns about tariffs initially took hold last week, the spread, or difference, between the yield on 10-year German bunds and 10-year Treasuries shrank, as investors sought out the U.S. haven.

 

That has quickly reversed.

 

Joe Rennison writes about financial markets, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders.

 

Colby Smith covers the Federal Reserve and the U.S. economy for The Times.