US President Donald Trump’s tariffs are hitting financial markets worldwide.
But Trump’s trade salvo has ridden a roller coaster and sent the stock market, a turbulence in the bond market, particularly the decline in bonds in parallel with stocks, which is the most concern among economists.
What is a bond?
A bond is a type of investment that involves buyers who lend money to the government or business for a particular period of time.
In return for the investment, the buyer will receive interest at a periodic designated interest rate in addition to the original investment amount for the maturity of the bond on a given date.
Although they typically offer lower returns than stocks, government bonds are widely considered among the lowest risk investment options.
Bonds issued by the US Treasury Department are particularly favored by investors as a safe haven asset by investors as they are supported by the world’s most powerful government and highest economy.
Due to its reputation as a safe asset during economic volatility period, the prices of the Treasury, known as “invoices,” “bonds,” or “bonds,” based on maturity date, rise as stock prices fall.
Treasury bond prices and yields move in the opposite direction. The cheaper the bonds, the higher the interest.
What’s going on in the bond market?
After Trump announced swept tariffs to dozens of US trading partners on April 2, investors began selling large quantities of US Treasury sales, sending yields sharply.
The sale hit the usual pattern of investors rushing to assets that are usually considered safe shelter despite heavy losses in the US stock market.
At its peak on Friday, Treasury yields rose to 4.58% in 2010, but below 3.9% the previous week.
The Treasury sale was widely seen as a serious warning sign for the US economy as it suggests investors are worried about Washington’s ability to pay off debts in the long term.
Amidst the market turmoil, Trump announced Wednesday a 90-day suspension for most of his “mutual” tariffs.
If not checked, rising Treasury yields could snowball into an economic crisis.
Higher yields make it more expensive for the US government to borrow money and serve national debts now over $36.22 trillion, increasing the risk of default.
They also raise the costs of citizens and bank borrowing and service. The balance sheet is important for the bank’s overall financial system health.
“I think that’s a pretty serious measure of concern,” Anastassia Fedyk, assistant professor of finance at the HAAS School of Business at the University of California, Berkeley, told Al Jazeera.
“While investors are not expecting the US government to be unable to pay off their debts in the near future, investors face a lot of uncertainty regarding the direction of the US economy.”
The ability of the bond market to change government policies is well documented.
After only 49 days in office, UK Prime Minister Liz Truss’ resignation in 2022 was driven largely by sudden bond yields following her tax revenue mini budget.
When he announced the 90-day suspension, Trump admitted that people were “a bit of a whim” about the bond market.
“The bond market needs to be very careful,” Trump said.
What’s next in the bond market?
Treasury yields have fallen since Trump’s face, but remained rising compared to recent weeks amid continuing uncertainty about how the US president’s trade war will unfold.
On Monday, Trump launched an investigation into semiconductor and drug imports at the predecessor of the new tariff, simultaneously highlighting the possibility of a respite from his duties in the automotive industry.
Trump’s administration has been imposing 145% tariffs on China since last week, but after a 90-day suspension, the fate of his “mutual” duties in dozens of other countries remains unknown.
“There is still a lot of uncertainty and the market situation is very fragile,” Fedik said.
“What will happen at the end of the 90-day suspension? How will the trade war with China evolve? In particular, China is the second-largest foreign holder of US government debt, so one potential escalation allows China to strategically load those positions.”
In an interview with Bloomberg Television on Monday, U.S. Treasury Secretary Scott Bescent rejected the proposal that the country’s status as a financially safe haven could be at risk after a sale at the Treasury Department.
The Treasury is “a long road” because it needs to take action, but “big toolkits” are freely available, including the option to expand its debt buyback programme, Bessent said.
“The Federal Reserve is free to use the tools to stabilize things through quantitative easing (purchasing more US government debt), as we saw at the start of the Covid pandemic,” Fedique said.
“I think one of the biggest issues right now is uncertainty. Trade policy hasn’t had a huge amount of fluctuation, and not only is it worried investors, it’s also struggling to plan policy responses.”