U.S. Treasuries’ haven status upended as global tariff war unleashed by Trump hits bond market

The steep selloff in U.S. government Treasury bonds alarmed investors across global markets as the tariff war between United States and China intensified, ensuring that even the traditionally safe asset class could not escape the market carnage. The plunging Treasury prices alarmed the White House, too.

On Wednesday afternoon, as the Treasuries’ rout was under way, President Donald Trump surprised the markets and the U.S.’s trading partners by ordering a 90-day pause on additional tariffs on all countries, except China. He did so after coming under pressure from high-profile CEOs and fund managers, among them BlackRock CEO Larry Fink, who warned that the tariffs were tipping the U.S. into recession.

Mr. Trump also lowered “reciprocal” tariffs to 10 per cent, effective immediately. In a social media post, he said that he paused the tariffs because more than 75 countries had informed the U.S. that they wanted “negotiate a solution” to the tariff war.

While Mr. Trump did not specifically mention the Treasuries selloff, he told reporters after announcing the tariff pause, “I saw last night that people were getting a little queasy,” adding that “The bond market now is beautiful.”

Global stocks plummet as Trump’s tariffs on China take effect

Canada will not be subject to new 10% tariff, says ambassador to U.S.

Analysts and strategists called the yield spikes disturbing, perhaps marking a loss of confidence in the world’s most liquid sovereign bond market, with potentially negative consequences for the U.S. economy. Rising yields, if they stick, would translate into higher borrowing costs for everything from government debt to mortgages, putting pressure on federal and state budgets and consumers.

He has stated in the past that he wants to reduce the the government’s debt payments. When the price of bonds fall, their yield rises, raising borrowing costs. The equity markets soared after Mr. Trump revealed his tariffs pause. Prices for Treasuries, however, were little changed immediately after his announcement.

The Treasuries selloff began overnight Tuesday, just after the White House raised its effective tariff rate on Chinese goods to 104 per cent, triggering Chinese countertarriffs of 84 per cent on U.S. goods.

Treasuries often rise in times of major market volatility or perceived risk, when investors seek safety and capital preservation. But the bonds came under extreme selling pressure in recent days as the trade war expanded, heightening economic and political tensions across the globe.

The yield on the 30-year notes briefly traded above 5 per cent overnight; they had spent the last two months between 4.4 per cent and 4.8 per cent. The yield on the 10-year notes jumped to 4.51 per cent before falling back to 4.43 per cent to end up 0.14 percentage points on the day. The 10-year yield was just under 3.9 per cent earlier this week.

A few market analysts and market strategists cited the bond price plunge as possible evidence that China is unloading Treasuries as retribution for Mr. Trump’s tariff hikes.

“China may be selling them in retaliation for tariffs,” Kenichiro Kitamura, general manager of Meiji Yasuda’s investment planning and research department in Tokyo, told Bloomberg. Treasuries “are moving due to political factors rather than supply and demand.”

But other analysts and strategists said that while foreign selling pressure on Treasuries could have played a factor in the selloff, they believed it was primarily owing to domestic U.S. investors, such as private-equity and hedge funds, raising cash to cover asset losses and and margin calls as the markets came under extreme pressure.

“The reason why I do not think that [foreign selling] is what’s going on is that the dollar is not going down in a significant way,” Torsten Slok, chief economist of New York’s Apollo Global Management, told clients Wednesday in a conference call. “If this really were the rest of the world questioning U.S. exceptionalism, I would expect to see a much more substantial decline in the dollar, so I do not think the rise in rates is driven primarily by foreigners selling. What I think is more likely is domestic investors doing risk reduction.”

The U.S. Treasuries market, worth US$29-trillion, is highly liquid. Foreign investors own about US$7.2-trillion of the bonds.

Some analysts said the selloff situation was similar to the one in March, 2020, near the start of COVID-19 pandemic, when market panic triggered a “dash for cash” that sent Treasuries plunging. The U.S. Federal Reserve responded by stepping up its bond purchases in an attempt to raise prices and bring down yields.

In a note to clients on Wednesday, Henry Allen, a Deutsche Bank strategist, called the soaring yields “alarming.”

He said that “U.S. Treasury markets are experiencing an incredibly aggressive selloff as we go to press, adding to the evidence that they’re losing their traditional haven status. So there’s no sign yet that the market is managing to successfully find a bottom, and it feels like no asset class has been spared as investors continue to price in a growing probability of a U.S. recession.”

There is no data available to prove that China has been unloading U.S. Treasuries in recent days. What is known is that Chinese holdings of Treasuries has been in gradual decline since 2018, according to the U.S. Treasury Department. At last count, in December, China owned US$759-billion worth of the bonds.

Before Mr. Trump’s tariff reversal, Apollo Management said the overall market volatility could endure for some time because Trump loyalists in Congress vastly outnumber his detractors. David Krone, Apollo’s global head of policy, said “This is not going to end in a matter of days ... The President right now is free to keep pushing his agenda. Republicans, for better or worse, are tied to President Trump.”