Confidence in the US economy is plummeting as investors dumped government debt amid growing concerns over the impact of Donald Trump’s tariffs. The US does not normally see high interest rates on its debt as its bonds are viewed as a safe investment, but on Wednesday rates spiked sharply to touch 4.5%.
After the US implemented a 104% tariff on products from China at midnight on Wednesday, Beijing hit back with an 84% levy on American products. Stock markets have been falling sharply over the past few days in reaction to the escalating global trade war and fears of tariffs leading to higher prices.
The interest rate – or yield – for US government borrowing over 10 years has spiked sharply in the past couple of days from 3.9% to 4.5%, the highest level since February. The rise has spooked economists because US bonds are traditionally seen as a so-called safe haven for investors to put their money in times of financial turmoil.
Rising bond yields mean higher costs for companies to borrow, and of course governments too. “Rising bond yields mean higher costs for companies to borrow, and of course governments too,” said Laith Khalaf, head of investment analysis at AJ Bell.
Some analysts suggested that America’s central bank – the US Federal Reserve – might be forced to step in if turbulence continues, in a move reminiscent of the Bank of England’s emergency action in 2022 following Liz Truss’s mini-Budget. “We see no other option for the Fed but to step in with emergency purchases of US Treasuries to stabilise the bond market,” said George Saravelos, global head of FX research at Deutsche Bank.
The UK is likely to be impacted by the US bonds sell-off. “When US treasuries sneeze, UK government bonds catch a cold – we have seen a significant move up in UK bond yields which means more pressure on the Budget,” said Mohammed El Erian, chief economic advisor at Allianz and former boss of the biggest bond manager Pimco.
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