The impact of Donald Trump’s tariffs was first felt in global equities as investors dumped risky stocks and bought into safe havens.
One of the safe havens that investors initially flocked to was the US Treasury market. 10-year Treasury yields briefly fell below 4% for the first time since early 2024 last week.
However, the initial flight to Treasuries has been replaced by broad selling as investors flee US debt, sending the 10-year yield as high as 4.5%.
While Donald Trump remains unconcerned about the rout in equity markets, rising bond yields will get his attention. Especially at the pace they have increased.
Rising bond yields will increase the cost of servicing the United States’ massive debt pile and threatens the entire global financial system. It will also curtail Trump’s plan to implement tax cuts.
The disruption in the bond market has led to calls for the Federal Reserve to step in to prop the market up through emergency bond purchases, or quantitative easing (QE).
Analysts at Deutsche Bank have suggested QE could be the only option to steady the bond market if Trump continues with his global trade war.
“US Treasuries are selling off at a pace we’ve rarely seen, levels that have historically triggered some form of intervention by the Federal Reserve despite Fed Chair Jerome Powell saying on Friday that it wasn’t time for a “Fed put” yet. Yet this kind of pressure in the bond market isn’t common, and when it has happened in the past, the Fed has often stepped in to ensure market stability,” said Lale Akoner, Global Market Analyst at eToro.
Rising bond yields also make it difficult for the Federal Reserve to cut interest rates – something Trump would like them to do.
There are also signs of financial strain elsewhere in the world. The Yen is strengthening against the dollar and the 40-year Japanese bond hit the highest level since 2007 overnight. The Chinese Yuan sank again overnight as 104% tariffs took effect.
Financial tensions are rising and the risk of something breaking is a cause for concern.