U.S. government bonds underwent a big sell-off early Wednesday, signalling investors were dumping the usually safe assets as tariff turmoil continues to rock the world.
After approaching 4.5 per cent in the morning, the yield — or interest — on the 10-year Treasury note pulled back to 4.39 per cent following U.S. President Donald Trump’s announcement of a 90-day pause on tariffs for most countries and a 125 per cent rate for China.
But that’s still up from 4.26 per cent late Tuesday and from just 4.01 per cent at the end of last week.
The moves in the bond market still may indicate economic stress.
These bonds, which are the bedrock of the global financial system, are typically seen as a safe place for investors to park their money. With the stock market making wild swings, investors should have be reaching for them, which would drive the yields down — but that wasn’t happening.
The rout in the roughly $29-trillion US Treasury market dragged borrowing costs across the globe higher, raising pressure on central banks and policymakers to act fast to shelter economies facing a sharp slowdown as the highest U.S. tariffs in more than 100 years took force.
Despite growing backlash at home and abroad, U.S. President Donald Trump defended his plans for tariffs on Tuesday, including slapping 104 per cent tariffs on China after it refused to lift retaliatory levies on American goods.
Japan will co-operate with the Group of Seven advanced economies and the International Monetary Fund to help stabilize a market rout, the country’s top currency diplomat said.
The Japanese 30-year government bond yield surged to 21-year highs and Britain’s 30-year bond yields rose to their highest since 1998. In contrast, German 10-year bonds were steady.
As New York trade got underway, Treasuries succumbed to fresh selling pressure, with 10-year yields last up some 20 basis points on the day.
Long-dated bonds were the focus of intense selling from hedge funds, which had borrowed to bet on usually small gaps between cash and futures prices.
The sell-off in long-dated bonds earlier today pushed the gap between two- and 10-year yields to the widest since 2022.
Stemming a crisis
Rising government borrowing costs filter across to corporate loans and mortgages, meaning what happens in bond markets can cause economic damage to businesses and households.
The U.S. Federal Reserve may need to cut rates by more than expected or offer a targeted lending facility, similar to the measures taken during the COVID-19 crisis and global financial crisis, some analysts said.
“Would expect to have some central bank response in the near term if markets continue to behave like they have been in the last 12 to 24 hours,” said Mark Elworthy, Bank of America’s head of fixed income, currency and commodity trading in Australia.
Others have pointed to potential changes in global trade flows over the long run slowing foreign buying of U.S. debt, or that foreign holders could turn sellers.
Soft demand for the U.S. Treasury’s $58-billion auction of three-year notes fuelled worries about tepid interest in the $39-billion sale of 10-year notes and a $22-billion auction of 30-year bonds on Thursday. The cost of insuring against a U.S. default, meanwhile, has risen.
“Markets are now concerned that China and other countries could ‘dump’ U.S. Treasuries as a retaliation tool,” said Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong.
