Truss’s Budget included a controversial rise in income tax, which led to a sharp sell-off in UK government bonds. The yield on the 10-year gilt shot up from 1.1% to 1.6%, causing uproar in financial markets.
What happens next?
With the pause on tariffs, all eyes are now on the upcoming G7 summit in June.
Mr Ashworth says Trump’s backtracking “has raised hopes that once he’s given the opportunity to calm down, he’ll realise the error of his ways”.
But the damage may have already been done. The bond market sell-off has left a lasting impression on investors, who may now demand higher yields for US debt for some time to come.
In conclusion
The recent turmoil in the US bond market has highlighted the fragility of global financial markets and the interconnectedness of economies around the world.
It has also shown the power that financial markets can wield over policymakers, even the President of the United States.
As the world watches and waits for the next move, one thing is clear – the bond market will continue to play a crucial role in shaping economic policy and decisions in the months and years to come.
the original source.
Stock markets around the world have been relatively settled this week after a period of chaos, sparked by US trade tariffs. But investors are still closely watching a part of the market which rarely moves dramatically – the US bond market. Recently, in an extremely rare move, the rate the US government had to pay on its bonds rose sharply, while the price of bonds themselves fell. The volatility suggests investors were losing confidence in the world’s biggest economy. You may think it’s too esoteric to bother you, but here’s why it matters and how it may change President Trump’s mind on tariffs.
What is a government bond?
When a government wants to borrow money, it usually does so by selling bonds – known as “Treasuries” in the US – to investors on financial markets. Such payments are made over a number of pre-agreed years before a full and final payment is made when the bond “matures” – in other words, expires. Investors who buy bonds are mainly made up of financial institutions, ranging from pension funds to central banks like the Bank of England.
What is happening with US bonds?
Investors buy government bonds because they are seen as a safe place to invest their money. There is little risk a government will not repay the money, especially an economic superpower like the US. So when the economy is turbulent and investors want to take money out of volatile stocks and shares markets, they usually place that cash in US bonds. But recently that hasn’t happened. Initially, following the so-called “Liberation Day” tariffs announcement on 2 April when shares fell, investors did appear to flock to US bonds. However, when the first of these tariffs kicked in on 5 April and Trump doubled down on his policies that weekend, investors began dumping government bonds, sending the interest rate the US government would have to pay to borrow money up sharply. The so-called yield for US government borrowing over 10 years shot up from 3.9% to 4.5%, while the 30-year yield spiked at almost 5%. Movements of 0.2% in either direction are considered a big deal. Why the dramatic sell-off? In short, the uncertainty over the impact of tariffs on the US economy led to investors no longer seeing government bonds as such a safe bet, so demanded bigger returns to buy them. The higher the perceived risk, the higher the yield investors want to compensate for taking it.
How does this affect ordinary Americans?
If the US government is spending more on debt interest repayments, it can affect budgets and public spending as it becomes more costly for the government to sustain itself. But it can also have a direct impact on households and even more so on businesses. John Canavan, lead analyst at Oxford Economics, says when investors charge higher rates to lend the government money, other rates for lending that have more risk attached, such as mortgages, credit cards, and car loans, also tend to rise. Businesses, especially small ones, are likely to be hardest hit by any immediate change in borrowing rates, as most homeowners in the US have fixed-rate deals of between 15 and 30 years. If businesses can’t get access to credit, that can halt economic growth and lead to job losses over time. Mr. Canavan adds that banks can become more cautious in lending money, which could impact the US economy. First-time buyers and those wishing to move home could also face higher costs, he says, which could impact the housing market in the longer term. It’s common in the US for small business owners starting out to use the equity in their home as collateral.
Why does Trump care?
Following the introduction of tariffs, Trump urged his nation to “hang tough,” but it appears the potential threat to jobs and the US economy stopped the president in his tracks. Following the ructions in the bond markets, he introduced a 90-day pause for the higher tariffs on every country except China. The 10% blanket tariff, however, on all countries remains. It proved a pressure point for Trump – and now the world knows it. “Although President Donald Trump was able to resist the stock market sell-off, once the bond market began to weaken too, it was only a matter of time before he folded,” says Paul Ashworth, chief North America economist at Capital Economics. According to US media reports, it was Treasury Secretary Scott Bessent, inundated with calls from business leaders, who played a key part in swaying Trump.
Is this similar to Liz Truss’s mini-Budget?
The bond market reaction has led to comparisons with former UK Prime Minister Liz Truss’s infamous mini-Budget of September 2022. Truss’s Budget included a controversial rise in income tax, which led to a sharp sell-off in UK government bonds. The yield on the 10-year gilt shot up from 1.1% to 1.6%, causing uproar in financial markets.
What happens next?
With the pause on tariffs, all eyes are now on the upcoming G7 summit in June. Mr. Ashworth says Trump’s backtracking “has raised hopes that once he’s given the opportunity to calm down, he’ll realize the error of his ways.” But the damage may have already been done. The bond market sell-off has left a lasting impression on investors, who may now demand higher yields for US debt for some time to come.
In conclusion
The recent turmoil in the US bond market has highlighted the fragility of global financial markets and the interconnectedness of economies around the world. It has also shown the power that financial markets can wield over policymakers, even the President of the United States. As the world watches and waits for the next move, one thing is clear – the bond market will continue to play a crucial role in shaping economic policy and decisions in the months and years to come. The recent announcement of unfunded tax cuts sent shockwaves through the financial markets, causing investors to panic and dump UK government bonds. This sudden sell-off prompted the Bank of England to intervene by purchasing bonds to prevent pension funds from collapsing.
Some experts even speculated that the US Federal Reserve might have been forced to take similar action if the situation had escalated further. While bond yields have since stabilized, the aftermath of the sell-off has left a lasting impact, with yields remaining higher than before the tax cuts were implemented.
Jonas Goltermann, deputy chief markets economist at Capital Economics, highlighted the emerging risk premium in US Treasury bonds and the dollar, drawing parallels to the turmoil experienced by the UK in 2022. This development raises concerns about the potential long-term effects on the economy.
Despite the uncertainty in the market, the immediate impact on Americans may not be as severe as it was for Brits facing higher mortgage costs. First-time buyers and homeowners looking to sell may not feel the immediate effects of the bond sell-off.
A key point of interest in this financial upheaval is the link between China and US bonds. Foreign ownership of US bonds has significantly increased over the past decade, with China being the second largest holder of US government debt globally. Speculation arose about whether China’s response to tariffs played a role in the sell-off, but experts believe that any drastic actions by China would ultimately harm its own economy more than it would hurt the US.
In conclusion, the recent events in the financial markets have raised concerns about the stability of government bonds and the potential ripple effects on the global economy. The actions taken by central banks and the behaviors of major players like China will continue to shape the future of the financial landscape.
