President Donald Trump’s blitz of tariff announcements has not only rattled investors in stock markets but also those US government bonds, calling into question their status as a “safe haven” asset.
US government bonds, known as treasuries, experienced a dramatic sell-off last week as investors became increasingly nervous that a trade war would tip the country’s economy into a recession.
Treasuries have long been considered a safe haven asset because they are backed by the world’s largest economy, with investors typically turning away from risk assets, such as stocks, in favour of these bonds amid economic uncertainty. However, this sell-off in treasuries pointed to weaker investor confidence in US economic dominance that they considered it riskier to lend to the US government.
The sell-off in treasuries drove a spike in yields, which are effectively the interest rate return that investors get for owning this debt.
The 10-year treasury yield (^TNX) had hit nearly 4.59% on Friday, a jump from where it stood on 4 April at 3.99%. According to note from Deutsche Bank macro strategists Jim Reid and Henry Allen, published on Monday, the spike in the benchmark 10-year treasury yield marked its biggest weekly jump since 2001.
The 30-year treasury yield (^TYX) also jumped last week, hitting 5% on Wednesday, compared to 4.39% on 4 April.
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Higher yields on government bonds means the cost of borrowing for governments becomes more expensive.
Edward Park, chief asset management officer at wealth management firm Evelyn Partners, said on Friday: “Arguably the main reason why Donald Trump reversed course over the enhanced tariffs is the increasing funding cost for the substantial US debt burden.”
“As we saw in the UK during and after the Liz Truss mini-budget crisis, the rising cost of long-term debt can quickly have political consequences,” he said.
Park said that despite Trump’s announcement of a 90-day pause on many higher tariffs, the “30-year US government funding costs remain very high, this suggests that global investors now require a higher yield to compensate them for the severe uncertainty created by the last week.”
“This is bad news for the US government which has a large deficit and therefore requires investors to buy their bonds to finance day-to-day spending,” he added. “It is also bad news for consumers who need to fund mortgages and companies that need to fund long term debt.”
While both yields had eased back on Monday, at the time of writing, they still remained elevated, with the 10-year rate at 4.45% and the 30-year rate at 4.86%.
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