Aside from the stock market, there are some very concerning moves in other markets. Bond prices soared last week, and yields tumbled, in the immediate aftermath of Trump’s tariff announcement. This made sense from a ‘flight to safety’ point of view, as US Treasuries are viewed as the safest asset out there.
But bond market prices have subsequently collapsed. At the end of last week, the yield on the 10-year Treasury fell to a six-month low of 3.86%, from 4.37% just one week earlier. This morning it rose above 4.42%. This was one of the sharpest yield moves in twenty years, prompting analysts to speculate why the huge bond sell-off?
A benign explanation would be that investors have gone from expecting the Fed to cut interest rates (so yields fall) in response to falling economic growth, to increasing them as tariff-led inflation takes hold. But even then, such a swift change in emphasis seems highly unusual.
The 30-year yield even broke above 5%, a psychologically critical line. Only days ago, the 10-year yield sat under 3.9%, highlighting just how swiftly confidence is evaporating.
Instead, it could be something far more serious, including forced liquidations from overleveraged bond players (similar to the LTCM disaster in the 1990s), or an indication that recent market stresses have damaged the plumbing on which the financial markets are based. It could be that one or more institutions has been making bets in the market based on assumptions that did not include a global trade war on this scale.
One theory involves China, which is one of the biggest holders of US Treasuries. It could sell these into the market to increase pressure on the US as a ‘negotiating tactic.’ This is a policy stick China’s government has not had to wave before, but this could be the time it gets used.
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Federal Reserve in no rush to cut rates
One thing made clear from Fed Chair Powell’s speech last Friday is that the US central bank is in no rush to cut interest rates in response to the market carnage.
“The uncertainty affects the Fed too, and they’re not about to do anything rash and exacerbate the problem, whatever that problem may turn out to be,” said David Morrison, a market analyst at Trade Nation. “Minutes from the Fed’s last monetary policy meeting will be released later this evening. But who cares? It’s all about tariffs now. And investors are forced to react to moves from the Trump administration, and then await the response from its targets.”
While savings rates might be more tied to the BoE’s benchmark rate, mortgage rates tend to be influenced also by bond yields. Global economic uncertainty can cause bond market volatility so that’s an added variable that could swing mortgage rates, and not just in the US.
But the key outcome here is whether central banks – the Fed, the BoE and the ECB – react to any inflationary effects by hiking rates, or whether they overlook short-term and possibly one-off price rises to look at the real economy and potentially even cut rates more than is currently expected.
“The so-called safe haven has been stripped bare,” says Nigel Green, CEO of deVere Group. “US Treasuries are behaving more like a high-risk asset than the traditional ballast investors once relied upon. The turbulence in Treasuries is globalizing fast. Borrowing costs in the UK and Japan also jumped sharply, showing the disruption isn’t confined to American shores. The asset that once served as the anchor for world markets is now sparking instability.”
Trump’s tariffs are acting as an accelerant, reigniting inflation fears, sowing uncertainty over global trade, and triggering a rapid move away from assets previously viewed as rock-solid. Hedge funds, major holders of Treasuries, have been cutting back risk and selling, forced to unwind basis trades and other complex strategies, further magnifying the sell-off.
“The old playbook no longer works”
“Markets are telling us in no uncertain terms that the old playbook no longer works,” deVere’s Green added. “If your portfolio still assumes Treasuries are the universal fallback in times of trouble, you are already behind the curve.”
Spreads between Treasury yields and interest rate swaps have widened sharply, a flashing red light that points to deep fractures in market plumbing. But the implications don’t stop at Treasuries. This turmoil poses an even bigger threat: it chips away at the dollar’s historic safe-haven status.
For decades, investors flocked to the greenback during bouts of volatility, trusting in the strength of US institutions, the liquidity of its markets, and the relative safety of its assets. Now, as tariffs inject fresh uncertainty into trade and investment flows, that trust is being tested.
Rising Treasury yields raise borrowing costs across the economy, tightening financial conditions just as global confidence becomes more fragile. If Treasuries are no longer seen as the risk-free asset, the logical next question is: how much longer can the dollar maintain its crown as the ultimate safe haven? Tariffs may deliver short-term political wins, but they carry long-term strategic costs, and threatening the dollar’s privileged status is a risk with enormous consequences.
Wild swings across global markets
There were more wild swings across US equity markets yesterday, with the S&P 500 clocking an intra-day high-low trading range of 6.8%, following Monday’s 8.4% and Friday’s 6.5%. US stock index futures had already recorded a 3.6% swing within a few hours of this morning’s trade.
This followed on from the imposition of fresh US tariffs at midnight, and as investors anticipated the likely responses from tariff-hit countries, in particular China and the EU. These wild swings, within the sell-off in risk assets, come on the back of President Trump’s more aggressive-than-expected tariff announcement after last Wednesday’s market close.
The sell-off in equities has certainly taken valuations down, particularly in the case of overhyped tech companies. But there are fears that amid the ongoing uncertainty, and the likelihood of severe reprisals, particularly from China, that there could be worse to come.
“Certainly, it seems unlikely that the Trump administration is going to back down, just because some froth has been blown of overpriced stocks,” Morrison at Trade Nation said. “And it’s clear that China is not about to negotiate, particularly after Trump’s response to China’s own ‘retaliatory’ levies on US imports, was to increase China’s tariff to 104%.”
