NEW YORK — While stock market fluctuations dominate the news, a more significant concern is brewing in the bond market, where investors are increasingly moving away from U.S. government bonds. Traditionally, Treasurys are seen as a safe haven during times of economic uncertainty, but current trends show a decline in purchases, even with the appeal of higher interest rates.
Experts are starting to worry that major banks and investment funds are losing faith in the reliability of American investments. “There’s a fear that the U.S. may no longer be viewed as a safe haven,” noted George Cipolloni, a fund manager at Penn Mutual Asset Management. “Our bond market has been known for its stability, but instability can lead to negative outcomes.”
This situation could potentially hurt everyday consumers looking for loans and create challenges for President Trump, who had hoped that pausing tariffs would help boost market confidence.
What’s going on?
Recently, the yield on the 10-year Treasury bond jumped from 4.01% to as high as 4.58% before settling around 4.50%. Such fluctuations are significant in the bond market, which typically sees smaller changes in yields.
As yields rise, borrowing costs for mortgages, car loans, and other types of loans are likely to increase, impacting average Americans. “When yields increase, borrowing rates will follow suit,” said Brian Rehling, head of fixed income strategy at Wells Fargo. “Corporations depend on these funding markets, and if they become pricier, that cost will likely be passed down to consumers or could lead to job cuts.”
U.S. Treasury bonds serve as IOUs for government expenses, balancing out the gap between revenue and spending.
While no one can pinpoint the exact reasons behind the challenges in the bond market or predict how long this trend will last, it’s causing concern on Wall Street. Normally, bonds serve as a counterbalance to stocks, providing a cushion during stock market drops. “This is basic economics,” said Jack McIntyre, a portfolio manager for Brandywine Global. “It’s confusing many people right now.”
The latest rise in bond yields was spurred by disappointing data regarding consumer sentiment, raising fears of inflation. However, broader concerns about America’s stability due to erratic policies and tariff threats are also casting doubt on the value of U.S. debt, concerns that aren’t likely to fade quickly, even after the ongoing tariff discussions end.
“When there’s a broader loss of confidence in the United States, it’s uncertain whether any trade retreats will significantly lower yields,” wrote Sarah Bianchi and other analysts from Evercore ISI. “We question whether the remaining strategies in Trump’s toolkit will be enough to stop the downward trend.”
The bond market’s impact
Trump has acknowledged the bond market’s influence on his decision to pause several tariffs, noting that investor confidence seemed to be wavering. If the bond market prompted his change of approach, it wouldn’t be surprising; its impact has been seen historically.
The swift rush to U.S. debt is a well-established trend among investors, even during unexpected times. For instance, during the 2009 financial crisis, even though the U.S. was at the heart of the issue, investors still flocked to Treasuries, valuing their reliability amidst chaos.
Even during financial turmoil, U.S. Treasuries have been considered liquid and stable, allowing investors to weather the storm. Falling yields during crises often lead to reduced borrowing costs, benefiting both businesses and consumers.
What’s driving the sell-off?
The current bond sell-off seems to be driven by various factors. Some speculate that China, a large holder of U.S. government bonds, might be selling them off as a form of pushback, though this seems counterproductive since it would also harm China’s economy.
Another possibility is that some hedge funds are facing difficulties with their borrowing strategies involving U.S. debt, prompting them to sell Treasuries to meet repayment needs. “They are selling Treasuries, causing yields to rise — that’s part of the bigger picture,” said Mike Arone, chief investment strategist for State Street Global Advisors. “However, a significant concern remains that the U.S. has become a less reliable partner on the global stage.”
Rehling from Wells Fargo expressed his worries about the loss of confidence in the U.S. but mentioned that it’s too early to draw definitive conclusions, suggesting that the sell-off might stabilize soon. “If Treasuries aren’t seen as the best place for cash, where can investors turn? There’s really no other bond that offers the same liquidity,” he noted.
