Trump Tariffs Trigger Sell-Off of US Government Debt

Trust in the US economy is declining sharply as investors sell off government bonds amid increasing worries regarding the repercussions of Donald Trump’s tariffs.

The yield on US bonds, normally seen as a “safe haven” during crises, surged dramatically on Wednesday.

Massive tariffs on imports from approximately 60 countries took effect at midnight, intensifying the ongoing trade conflict between the US and China.

Following the US’s imposition of a 104% tariff on Chinese goods, China retaliated with an 84% tariff on US products.

Stock markets have sharply declined in recent days due to Trump’s insistence on imposing tariffs.

However, the offloading of bonds—a form of government-issued IOU used to raise capital—presents a significant challenge for the largest economy in the world.

Purchasing US government debt, known as Treasuries, is regarded as a secure investment as the government is expected to repay its debts.

Yet, on Wednesday, the yield—or interest rate—on US bonds reached its highest point since February, at 4.5%, making borrowing more costly for the US.

Although this rate mirrors levels from a couple of months ago, interest rates for US borrowing over ten years have surged dramatically from 3.9% in the last 48 hours.

Some analysts indicated that the US Federal Reserve might have to intervene if instability persists, reminiscent of the Bank of England’s emergency actions in 2022 after Liz Truss’s mini-budget announcement.

“We view the Fed having no alternative but to intervene with emergency purchases of US Treasuries to stabilize the bond market,” stated George Saravelos, global head of FX research at Deutsche Bank.

“This is uncharted territory,” he noted, emphasizing the difficulty in predicting market reactions in the upcoming days as the bond market signaled that investors had “lost confidence in US assets.”

Simon French, chief economist at Panmure Liberum, shared with the BBC that the Fed might opt to lower interest rates to safeguard US jobs by facilitating easier access to funds for businesses facing rising costs due to tariffs.

He remarked that the situation is a “coin toss” regarding whether the US will slip into a recession.

A recession is characterized by a persistent decline in economic activity, generally seen through rising unemployment and decreasing income levels.

JP Morgan, the major investment banking firm, has increased the probability of a US recession from 40% to 60% and cautioned that US policy is “moving away from growth.”

Trump’s tariff implementations on foreign imports could disrupt numerous global supply chains.

American companies that import these foreign products will bear the tax burden, directly paying it to the government.

Firms may opt to transfer some or all of the tariff costs to consumers, which might lead to heightened inflation.

Trump’s initiative aims to shield American businesses from global competition while encouraging domestic manufacturing.

Uncertainty persists regarding the nature and extent of the investors who are selling off US bonds.

Speculation arises that certain foreign nations, including China, which holds approximately $759 billion in US bonds, may be divesting from them.

Mr. Saravelos commented: “There is minimal space remaining for further escalation on the trade front. The subsequent stage risks escalating into a full financial conflict involving Chinese ownership of US assets.”

However, he cautioned: “No one will emerge victorious from such a conflict. The global economy stands to be the ultimate loser.”