In the realm of finance, few things are as certain as this: when fear looms large, investors flock to American government bonds.
U.S. Treasuries have been an attractive option for investors, assuming that in times of crisis — whether it be financial upheaval, war, or natural calamities — the federal government will persist and honor its debts, rendering these bonds as a nearly divine safe harbor.
However, the recent upheaval in bond markets showcased how President Trump has undermined trust in this fundamental expectation, putting into question the formerly unshakeable confidence in U.S. government debt. His ongoing trade conflict, particularly with China, escalates fears of a global economic slump and tarnishes America’s reputation as a reliable leader in peace and stability.
“The entire world seems to have concluded that the U.S. government is directionless,” remarked Mark Blyth, a political economist at Brown University and co-author of the upcoming book “Inflation: A Guide for Users and Losers.”
A decline in confidence regarding the governance of the largest economy in the world appears to have contributed significantly to the recent bond market sell-off. When numerous investors unload their bonds simultaneously, it forces the government to increase interest rates to attract new buyers. This rise in rates typically translates into higher costs for mortgages, auto loans, and credit card balances throughout the economy.
In the past week, yields on the critical 10-year Treasury bond spiked to around 4.5 percent from just under 4 percent — marking the most significant rise in nearly 25 years. Simultaneously, the value of the U.S. dollar has been decreasing, despite expectations that tariffs would elevate it.
Several factors contribute to this bond sell-off. Hedge funds and other financial entities have liquidated their holdings while unwinding complex trades designed to capitalize on discrepancies in bond prices versus anticipated future values. Speculators have also been offloading bonds to recover cash in light of losses in plummeting stock markets, aiming to avoid bankruptcy.
Concerns have arisen that China’s central bank, which maintains $3 trillion in foreign reserves, including $761 billion in U.S. Treasury securities, might be selling as a retaliatory measure against American tariffs.
With so many intertwined factors, the notable rise in government bond yields resembles an alarming medical diagnosis: while various issues may be causing the decline, none of them signal good news.
One explanation is the perceived downgrade of the U.S. role in global finance, shifting from a safe haven to a source of risk and unpredictability.
As Mr. Blyth stated, Treasury bills have transitioned from being regarded as “information invariant assets” — secure investments regardless of current events — to “risk assets” susceptible to being offloaded in times of market fear.
The Trump administration has promoted tariffs as a means to revive American manufacturing jobs, claiming that short-term chaos will lead to long-term rewards. However, many economists argue that global trade is being undermined without a well-defined strategy, and the haphazard implementation of tariffs — often announced then rolled back — has eroded confidence in the U.S. system.
For years, economists have expressed concern regarding a potential rapid decline in international buyers’ willingness to purchase U.S. government debt, which could lead to a sharp and destabilizing rise in American interest rates. By numerous indicators, that moment may be upon us.
“People are becoming uneasy about lending us money,” noted Justin Wolfers, an economist at the University of Michigan. “They are declaring, ‘We’ve lost our trust in America and its economy.’”
For Americans, this reassessment poses a threat to a unique form of privilege. The United States has historically acted as a safe harbor for the global economy, allowing the government to secure financing for its debt at lower interest rates. This has in turn reduced costs for mortgages, credit card debt, and auto loans, enabling American consumers to spend more freely.
Simultaneously, foreign investments in dollar-denominated assets have strengthened the U.S. dollar, making imports cheaper in dollar terms.
Critics have long contended that this system is both unsustainable and harmful. The influx of foreign capital into dollar assets has allowed Americans to indulge in imports — benefiting consumers, retailers, and financiers — at the expense of domestic manufacturing employment. Chinese firms have gained a foothold in critical sectors, rendering Americans reliant on a distant adversary for essential items such as basic medications.
“The U.S. dollar as the primary safe currency has led America to become the chief facilitator of global economic imbalances,” wrote economist Michael Pettis in a recent opinion piece for The Financial Times.
However, economists who share this perspective generally advocate for a gradual process of adjustment, proposing that the government adopt industrial policies to foster the emergence of new sectors. This line of reasoning has informed the Biden administration’s economic strategies, which include certain tariffs against the Chinese market to shield American businesses while allowing them time to gain traction in areas like clean energy technology.
Revitalizing American industry necessitates investment, which hinges on predictability. Mr. Trump has cautioned businesses that to avoid his tariffs, they must establish manufacturing bases in the United States, while escalating trade protectionism to levels not seen in over a century.
Even a sudden decision from the White House to suspend most tariffs on all trading partners except China did not alleviate the sense that a significant shift is taking place — one wherein the United States must be perceived as a possible rogue player.
Mr. Trump’s disregard for diplomatic norms is nothing new. His “Make America Great Again” ethos centers on the belief that, as the world’s largest economy, the U.S. wields authority over its own terms.
Nonetheless, the downturn in the bond market reflects shock at the extent to which this principle has been applied. Mr. Trump has deviated from eight decades of faith in the advantages of global trade: economic growth, lower-priced consumer goods, and diminished risk of conflict.
Acknowledgment of the unequal distribution of the benefits of trade has become a common understanding among economists. Frustration over job losses in industrial regions played a role in Mr. Trump’s ascendance and reshaped trade politics. Nevertheless, many economists caution that the trade war could further undermine the prospects for American manufacturing.
The tariffs jeopardize current employment in factories reliant on imported components. Economists have remarked that the imposed rates appear to be arbitrary.
“What the market finds troubling is the seemingly random and erratic approach to the tariffs,” stated Simon Johnson, a Nobel laureate economist from MIT. “It gives the impression that there’s no coherent strategy, just chaos. It’s an unprecedented level of unpredictability.”
The immediate fallout of rising interest rates on U.S. bonds entails an increased burden on the federal government to meet its debt obligations, diverting funds away from essential services such as education and infrastructure maintenance.
The broader implications, while less predictable, could escalate into a recession. If households are compelled to spend more on mortgages and credit card payments, they will likely curtail their discretionary spending, placing pressure on businesses of all sizes. Consequently, companies may opt to delay hiring and expansion efforts.
The turmoil in the bond market serves as a dual indicator: it signifies that investors perceive the adverse scenario unfolding and also acts as a catalyst for future challenges through increased borrowing costs.
For years, foreign holders of U.S. bonds have sought to diversify their holdings into alternative savings vehicles. Yet, the dollar and U.S. government bonds have continued to retain their position as the ultimate form of security.
Europe and its shared currency, the euro, now appear to be gaining status as a part of the global financial landscape still operated with sound oversight. However, Germany’s strong aversion to issuing debt has limited the options for investors searching for another reliable place for their investments.
This dynamic may soon shift, as suggested by Mr. Blyth. “Should Europeans decide to issue a ‘sanity bond,’ the global market might very well embrace it,” he stated.
The Chinese government has long aspired to elevate the status of its currency, the renminbi. However, foreign investors still do not perceive China as a model of transparency or adherence to the rule of law, which limits its viability as an alternative to the United States.
This situation leaves the world in a perplexing predicament. The traditional safe haven has begun to lose its appeal, yet no immediate contender appears capable of taking its place.
