The Alarming Signals from the U.S. Bond Market

The market for U.S. Treasury bonds, a crucial component of the global financial system, has been "flashing a warning sign". The recent selloff in Treasuries, which moves inversely to yields, suggests a decline in global confidence in the U.S. economy itself. This development has caught Wall Street and Washington off guard.

 

Several factors make this bond market activity particularly concerning. Despite "subdued inflation, falling consumer confidence, and signs of a weakening economy," bond yields arguably should be decreasing. Instead, long-term Treasury yields have been elevated, with the 30-year yield nearing 5% and on track for its biggest weekly gain since 1987. This rise in yields puts pressure on the real economy by increasing the costs of business and consumer debt, including mortgages and car loans.

 

Adding to these worries are the sharp rise in gold prices, which hit a new record, and the dollar, which fell to its lowest level since 2022. The rally in gold may indicate that international buyers are increasingly seeking safety in the metal. Furthermore, the dollar’s weakness could make it more difficult for the Federal Reserve to cut short-term interest rates this year.

 

The sources suggest a strong link between the bond market's troubles and President Trump's tariff policies. It was reportedly the bond-market turmoil, more so than the stock market selloff, that prompted the White House to pause some tariffs. This underscores the significant influence of the fixed-income market. However, despite the pause, the overall tariff level remains high, and the potential for renewed tariff actions persists.

Analysts like Bill Campbell from DoubleLine have expressed concern that Trump's trade wars may be alienating the very foreign capital the U.S. needs to fund its massive budget deficits. The U.S. is a debtor nation and relies on attracting foreign investors.

The bond market's reaction highlights a broader issue of confidence. Some in the bond market reportedly believed the Treasury Department wasn’t fully in control during the period of high volatility. Treasury Secretary Scott Bessent’s assurances that there was "nothing systemic" happening did little to quell these concerns. The lasting lesson of this episode may be that confidence, once lost, is hard to win back.