The foundation of the financial system shook on Friday as government bond yields surged, eroding investors’ confidence in the crucial role of the United States in the financial landscape due to the chaotic implementation of tariffs.
U.S. government bonds, commonly referred to as Treasuries due to their issuance by the U.S. Treasury, are supported by the full trust of the American government and have long been regarded as one of the safest and most reliable markets worldwide.
However, the erratic behavior of the Treasury market throughout the week has sparked concerns that investors are losing faith in U.S. assets amid the intensifying trade war initiated by President Trump.
The yield on a 10-year Treasury bond, which is a key benchmark for corporate and consumer borrowing and arguably the most significant interest rate globally, jumped approximately 0.1 percentage points on Friday. This increase was part of a turbulent week that saw the yield on the 10-year Treasury rise from under 4 percent at last week’s close to about 4.5 percent this week.
Though these increases may appear minor, they represent substantial fluctuations in the Treasury market, prompting investors to signal that Mr. Trump’s tariff policies are inciting significant instability. This shift is also relevant to consumers; for those with a mortgage or auto loan, the interest rates charged are linked to the 10-year yield.
Ten-year Treasuries are also viewed as a safe haven during stock market volatility; however, this week’s steep rise in yields has rendered this market exceptionally risky.
Yields move inversely to prices, so as yields have unpredictably escalated, global investors holding trillions in Treasuries are witnessing a sudden drop in value.
The increases in yields on the 30-year long bond have also reached historic levels, analysts note. This bond is particularly favored by pension funds and insurance firms because they deal with long-term liabilities.
“This situation is unprecedented,” wrote Ajay Rajadhyaksha, global chairman of research at Barclays, in a Friday report. Searching for explanations, Mr. Rajadhyaksha highlighted selling by Asian investors reacting to tariffs and the potential unwinding of highly leveraged positions in the Treasury market. “Regardless of the reason, bond markets are currently in jeopardy,” he stated.
The yield on the 30-year Treasury bond climbed by 0.44 percentage points this week, ending roughly flat on Friday. This movement suggested a significant change in demand for the long bond. The Federal Reserve controls several short-term interest rates that influence broader financial markets. However, the impact diminishes the further one moves from the Fed’s rates.
“At the longer end of the curve, the Fed’s influence is minimal,” remarked Matt Eagan, a portfolio manager at Loomis, Sayles & Company. “There are fewer natural buyers in that arena, leading small changes in supply and demand to trigger larger swings.”
Another concerning trend observed this week was the drop in the U.S. dollar, which fell 0.8 percent against a basket of currencies from its major trading partners on Friday. All currencies from the group of ten nations appreciated against the dollar, indicating a shift away from U.S. assets.
A declining dollar alongside a drop in government bonds and stocks is an unusual scenario, given the dollar typically acts as a refuge in the global financial system.
In spite of the continuing slump in the stock market, which is nearing bear market territory, it was the unnerving bond market that prompted President Trump to announce a postponement of the most severe tariffs for numerous countries on Wednesday.
“The Treasury market is the significant risk factor at play,” stated Mr. Eagan.
For investors, the volatility recalls the extreme price fluctuations experienced during the pandemic-related sell-off in March 2020 and the tumult of September 2019. Such events rattled investors and led to swift interventions by the Federal Reserve to stabilize the market.
Currently, the Fed finds itself in a complicated situation. The inflationary consequences of tariffs necessitate that the central bank maintain higher interest rates; however, reducing rates could better support both financial markets and economic expansion, a move that the central bank has hesitated to pursue thus far.
On Friday, a closely monitored consumer sentiment index dropped to its lowest point in nearly three years. Anticipations for future inflation surged, further complicating the Fed’s dilemmas.
Simultaneously, this week’s disorganized execution followed by a partial retreat on global tariffs, compounded by the intensifying trade conflict with China, has left global investors uncertain about their reliance on the Treasury market and even the U.S. dollar as a bastion of security and stability.
Foreign investors remain among the largest holders of U.S. government debt. Japan holds the largest amount, with over $1 trillion in U.S. Treasury securities, while China follows as the second-largest holder with $760 billion, having already slashed its holdings by more than $250 billion since 2021.
“PEOPLE NEED TO WAKE UP,” Andrew Brenner, a seasoned bond trader and head of international fixed income at National Alliance Securities, stated in a concise email. “THIS IS FOREIGN MONEY PULLING OUT OF THE TREASURY MARKET AS A RESULT OF TARIFF POLICIES.”
Certain analysts and investors are concerned that an accelerated selling pace by foreign investors could drive U.S. Treasury yields higher, consequently pushing U.S. interest rates up as well.
“Engaging in disputes with major trading partners that finance your debt poses significant risks, especially with a considerable fiscal deficit and no viable plan to address it,” warned Mr. Eagan.
Globally, alternative investments are also gaining traction. Germany has recently unveiled plans to bolster its military, funded through new debt. The German bond market is considered Europe’s benchmark and often compared to Treasuries. As concerns regarding tariffs gained momentum last week, the gap, or spread, between the yields on 10-year German bunds and 10-year Treasuries narrowed, as investors gravitated toward the American safe haven.
That trend has now swiftly reversed.
