The US government's rapid bond market and dollar sales have sparked fears about rising radioactive fallout from President Trump's tariffs, raising questions about what appears to be the safest corner for investors during a period of chaos.
The 10-year Treasury yield, which was whipped Wednesday, was whipped after Trump suspending most of the taxes he threatened the previous week and increasing the fees charged in Chinese goods after the country retaliated. The reversal caused us to see our inventory rise.
After the announcement, the 10-year bond traded at 4.35%, slightly lower than the beginning of the day, but well above recent levels. Just a few days ago, it was below 4%. The 30-year bond yield overturned its previous rise above 5%. Currently, it is 4.74%. Sales accelerated a stimulus in government bonds in the short term, with yields increased by 3.9% over the two years, close to 0.2%.
Amidst the rage, other markets believed that alternative safe havens had been acquired for the US. Yields on German government bonds, which serve as a benchmark for the eurozone, fell on Wednesday, showing strong demand. Gold prices have also risen.
US-centric volatility comes shortly after investors fleeing globally risky assets, despite the similar fears to the episode known as the “dash for cash” during the pandemic, when the Treasury market collapsed. Recent moves have overturned long-standing relationships in which the US government bond market serves as a safe port in times of stress.
It was the unrest on Wednesday, and the fact that the US dollar, the dominant currency of the world and was primarily expected to strengthen as Trump's tariffs came into effect, has instead weakened. After the administration's announcement, some of these losses were shaved.
“We've seen a lot of effort into making our customers more comfortable,” said Priya Misra, Portfolio Manager at JP Morgan Asset Management. “There was a disorderly movement this week because there's no safe place to hide.”
U.S. Treasury Secretary Scott Bescent attempted to curb concerns on Wednesday, attributed the bond market sale to investors who bought assets with borrowed money and now have to cover their losses.
“I don't think there's anything systematic about this. I think what's going on in the bond market is unpleasant but normal delaboration,” he said in an interview with Fox Business. Speaking to reporters after the suspension was announced, Bescent said financial markets have become more “certain” with the latest announcement.
Speaking later that afternoon, Trump admitted that bond market investors had been “a little creepy” the night before.
“I was looking at the bond market,” he said. “The bond market is very difficult, but looking at it now it's beautiful.”
To explain some of the sales on Wednesday, traders had pointed to a specific strategy known as “base trade.” Hedge funds are attempting to exploit price differences in the financial market by selling futures contracts and purchasing relatively inexpensive underlying securities. These bets are often amplified using borrowed money. This can come back, but will increase the losses if the market moves in the wrong direction. Back in 2020, the bet exploded, causing dysfunction in the financial market, eventually becoming extreme, and the Federal Reserve took action.
Since that episode, the Fed has established permanent facilities that allow banks and other eligible institutions to exchange Treasury and other government obligations for cash, smoothing out the liquidity crunch that may arise and helping to raise the standard for future intervention.
The Fed holds the largest debt of the US government, followed by other domestic private sector agencies. Japan and China are the two largest international holders.
The scope and size of Wednesday's movement was important enough to raise broader concerns about how foreign investors are currently perceived by the United States in the face of Trump's punishment tariffs. Some countries are trying to negotiate a deal with the United States. However, China retaliated on Wednesday with 84% collection on US goods after Trump raised the tariff rate on Chinese products to 104%. He again increased it to 125% on Wednesday.
Peter Chill, head of macro strategy for investment firm Academy Securities, said:
In a social media post Wednesday, former U.S. Treasury Secretary Lawrence H. Summers said the broader sale suggested “a generalized aversion to US assets in global financial markets” and warned of the possibility of a “severe financial crisis induced entirely by the US government's fee policy.”
“We are treated by global financial markets like problematic emerging markets,” he writes.
Jens Nordvig of research firm Exante Data agreed on Wednesday that there was a “EM-like” talent in the dollar turnover as U.S. Treasury was sold. As the ultimate safe haven in the world, the dollar tends to do its best during periods of market turbulence. In recent years it has also benefited from the strong economy of the US economy, which has surpassed other parts of the world since the pandemic. Trump's tariffs are expected to slow the scene, and economists are now worried about the recession.
The recent weakening of the dollar has also amplified fears about the effects of tariffs inflation. Trump's top economic advisers have long argued that protectionist policies will value the dollar and help offset the corresponding rise in consumer prices.
During the confirmation hearing, Bescent argued that 4% could be highly valued at 10% collection. That's not happening. This means that Americans could face rising consumer prices.
“Our exceptionalism came out the window a long time ago,” Nordwig said. “Now, it's the question of whether people are afraid of US assets or not. That's the next step.”
His concern is whether the administration will move beyond mere tariffs and begin to think about controlling capital flows as well.
“If even their closest allies can limit these extreme restrictions to trade, can they also limit capital flows?” asked Nordwig. “No one knows. There are no restrictions here.”
Over time, the fear is that policies like the ones Trump is pursuing will have lasting implications. Jamie Dimon, CEO of JPMorgan Chase, told Fox Business Wednesday morning.
But even if tariffs are suspended, many currency experts say there is an irrevocable loss.
“Everything that the administration has done in recent months seems to be calibrated to overturn the dollar's advantage,” said Stephen Cumin, who previously ran the international finance division for the Fed and is now a senior fellow at the American Institute of Corporate Research.
