During market turbulence, US government bonds tend to be a “safe haven.” But the past week showed something completely different. On 9 April, when Trump’s new tariffs were to take effect, investors sold off US government bonds. Nordea Senior Strategist Sara Midtgaard takes a closer look.
Trump’s tariffs have created a market roller coaster. On 2 April, Trump announced his new retaliatory tariffs and a base tariff of 10 percent that were supposed to take effect a week later, but that did not happen. Now there will be a 90-day tariff break, except for the countries that have responded by raising tariffs on imports from the US, such as China, and the 10 percent base tariff. This resulted in a massive U-turn in the stock market, and the dollar weakened 4.7 percent against the EUR throughout last week. But the turmoil is far from over.
Tariffs on imports to the US are the highest in a century, despite Trump’s tariff pause. These are major changes in trade policy in a short amount of time.
We have previously written about the Mar-a-Lago Accord, addressed by both Zoltan Poszar (2024) and Stephan Miran (2024), about how the US can force countries to jointly weaken the dollar and swap holdings of US government bonds for ultra-long bonds without interest. Stephan Miran’s paper describes that tariffs should first be raised and then used as a bargaining chip, in order to get countries on board with such a plan. This could subsequently weaken investor confidence in the world’s largest bond market.
During market turbulence, US government bonds tend to be a “safe haven.” But the past week showed something completely different. On Wednesday, when Trump’s new tariffs were to take effect, investors sold off US government bonds.
During market turbulence, US government bonds tend to be a “safe haven.” But the past week showed something completely different.
Like in March 2020, much of the blame for the sell-off in US Treasuries is put on the basis trade. This is a popular trade by hedge funds, which involves leveraging the small difference in price between the US Treasuries and associated futures contracts. The trade is vulnerable to the cost of short-term repo financing, which typically increases during market turmoil. When hedge funds reverse those positions, it involves selling US Treasuries, resulting in a significant rise in government bond rates. The rate on 30-year US government bonds rose by almost 60 bp in two days.
Real money demand for US Treasury bonds does not seem to be very strong either, especially after last week’s auction for three-year notes that resulted in the weakest demand since 2023. If more investors gradually become more sceptical of Trump’s policies, or fear a possible restructuring of government bonds, government yields could rise much more than we have seen so far. China, which is the world’s second-largest holder of US Treasuries after Japan, could choose to sell US bonds during an escalating trade war.
The rise in US bond rates is worse for Trump than the sharp decline in the stock market. The US’s massive debt needs constant refinancing, and it could be demanding if the US bond market continues such a weakening trend. It is also problematic for the US economy, since higher Treasury risk premiums will increase the borrowing cost for the entire economy.
If the past week has taught us anything, it is that even Trump will bow to market pressure if things get really turbulent.
See the full article on Nordea Corporate, Macro & Markets: US Treasuries no longer ‘safe haven’?
