Behave like a banana republic, and the bond market will start treating you like a banana republic. That was the damning view of analysts and bond traders wrongfooted over the past few days by the extraordinary gyrations in the US government bond market in response to President Trump’s unpredictable threats and chaotic policy shifts.
The $27 trillion market for US government bonds has been seen for decades as a bastion of certainty, a safe haven which investors traditionally retreat to amid geopolitical or financial market uncertainty. Treasuries, as they are known, are also the world’s only serious reserve asset, the securities almost every nation on earth salts away, alongside gold and energy stockpiles, for emergencies of all kinds.
But cracks have appeared in that image in the past few days as the prices of treasuries tumbled and their associated yields rocketed, defying normal expectations that they would do the opposite. By Friday, yields were broadly up by about 0.4 percentage points, which was the biggest weekly rise since 2019. The US government now has to pay more to borrow than Greece, a country not so long ago seen as at serious risk of default.
The most worrying moves came on Wednesday, prompting Larry Summers, a former US Treasury Secretary under Bill Clinton, to post on X: “We are being treated by global financial markets like a problematic emerging market. This could set off all kinds of vicious spirals, given government debts and deficits and dependence on foreign purchasers.”
The benchmark ten-year US government bond was on track to rise by more 40 basis points across the week. Relative to German government bonds, US treasuries registered their biggest underperformance since at least 1989, according to data from Bloomberg. There was a brief respite on Wednesday, after President Trump’s partial retreat on tariffs, but on Friday, the rate on the 30-year US treasury rose by seven basis points to just under 5 per cent, while the rate on the ten-year bond leapt by 13 basis points to 4.553 per cent.
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Analysts at the Dutch bank ING said that the concurrent falls in US stock prices and government bond prices this week “demonstrated a radical shift away from US assets”. Typically, when stock prices fall, investors move their money into safer assets such as bonds, which puts upward pressure on prices.
Other countries have not been immune to the selling pressure. The yield on the UK government bond jumped by ten basis points on Friday to 4.726 per cent and the rate on the 30 year bond — which reached its highest level since 1998 this week — climbed by nine basis points to 5.502 per cent. Higher bond yields, if sustained, threaten to erode the chancellor Rachel Reeves’s slim £9.9 billion of headroom against her fiscal rules.
But it has been the US in the centre of the bonds storm and the wobble there has been portrayed by some as early signs of an inflection point that could change the world. “We are seeing a classic breakdown of the major monetary, political and geopolitical orders,” Ray Dalio, the plain-speaking billionaire founder of the hedge fund group Bridgewater Associates, posted on X.
“Key correlations are breaking,” noted Freya Beamish at the macro-economics consultancy TS Lombard. “Go to your safe space,” she advised. “If your safe space was US treasuries, then find a new one.” Gold, or German or UK government bonds, she suggested.
“Treasuries are not behaving as a safe haven,” the ING rates strategist Padhraic Garvey told Bloomberg. “If we were to slip into recession there is a path there for yields to revert lower. But the here and now is painting treasuries as a tainted product, and that’s not comfortable territory. Treasuries have proved to be a ‘pain trade’ too.”
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Not everyone is that gloomy. An auction of 30-year bonds on Thursday saw investors happily snap up $22 billion of new US debt, hardly the actions of institutions seeing the US as a serious risk. Some argue that prices will rally and yields come back down, especially if US inflation continues to come in lower than expected — as happened on Thursday.
Scott Bessent, Trump’s treasury secretary and a markets veteran who spent years working at the hedge fund operations of George Soros, has tried to calm the jitters. “I believe that there is nothing systemic about this — I think that it is an uncomfortable but normal deleveraging that’s going on in the bond market,” he told Fox Business News.
Even so, for now US yields are considerably higher than before Trump triggered the spasm of turbulence with his “liberation day” announcements on tariffs ten days ago. That not only hugely increases the potential cost of future US government borrowing, if they are not reversed. It also raises debt costs for everyone else who borrows in US dollars: from American companies to emerging market governments.
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Credit conditions are souring, according to Alexandre Birry, a credit analyst with the debt rating agency Standard & Poor’s. “Borrowers are having to pay up for financing and, worse, some lower-rated borrowers could be shut out of the capital markets.” JP Morgan Chase, which has just lifted its bad debt provisions by $3.3 billion, won’t be the only bank preparing for higher borrower defaults.
Two different forces have been posited to explain the unusual pattern. One is that hedge funds have been caught out in a classic trade that has gone badly wrong. Initially modestly falling prices have forced them to meet margin calls from their banks and counterparties, which have forced them to sell more treasuries, which in turn push prices lower, in a kind of self-feeding doom loop. The very high levels of leverage in these normally low-risk trades — known as basis trades — have hugely amplified the shock.
Many traders think it was this alarming sign of stress that forced Trump to change tack on Wednesday evening (UK time), when he announced a 90-day pause on his threatened tariffs to all countries except China. Tumbling equities were one thing and could be tolerated, but any serious shock to the bedrock underpinning all financial markets and the key determinant of the cost of future government borrowing was unthinkable, even to Trump.
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“He was able to temporarily stand firm against the slump in equities, but once the weakness spread to the bond market, with long yields actually rising, a climbdown became inevitable,” said Paul Ashworth at Capital Economics.
The second potential explanation is perhaps more serious. After all, those bets will eventually be unwound, hopefully without hurting anyone other than those hedged funds who got in too deep. The wider problem is if the big sovereign holders of treasuries are starting to pull back: either out of a general concern about the US, or as a deliberate retaliationary tactic to Trump’s brinkmanship. Japan and China are the two biggest holders of US sovereign debt, both nations firmly in the sights of Trump.
The notion of the world seriously pulling back from US treasuries is still seen as unlikely. No other nation has the economic and geopolitical heft, stability, track record and (until very recently) investor trust to take over as a credible sponsor of the world’s reserve currency. However, it was noticeable that some rival government bond markets took the turbulence in their stride this week, in particular German bunds.
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“The dollar is not going to be replaced and it is very unlikely that any single alternative will emerge,” said Paul Donovan at the Swiss bank UBS. But its importance will fade over time. He likens it to the declining importance of sterling in the 1930s, with several alternative currencies playing a larger role.
Beamish at TS Lombard thinks any transition away from the dollar will be very bumpy for markets. “We judge that the Trump administration is now halfway across the Rubicon. If Trump makes it all the way across, utter chaos will ensue. There is no market that is deep enough to accept the capital currently held in the US dollar financial system.”
