The bedrock of the financial system trembled on Friday, with government bond yields rising sharply as the chaotic rollout of tariffs shook investors’ faith in the pivotal role played by the United States in the financial system.
U.S. government bonds, known as Treasuries because they are issued by the U.S. Treasury, are backed by the full faith of the American government, and the market for Treasuries has long been deemed one of the safest and most stable in the world.
But the Treasury market’s erratic behavior all week has raised fears that investors are turning against U.S. assets as President Trump’s trade war escalates.
The yield on a 10-year Treasury, which underpins corporate and consumer borrowing and is arguably the most important interest rate in the world, rose 0.1 percentage points on Friday. Friday’s rise added to sharp moves throughout the week that have taken the yield on the 10-year Treasury from less than 4 percent at the end of last week to more than 4.5 percent this week.
These increases may seem small, but they are large moves in the Treasury market, prompting investors to warn that Mr. Trump’s tariff policies are causing serious turmoil. It matters to consumers as well. If you have a mortgage or car loan, for example, then the interest rate you pay is related to the 10-year yield.
Ten-year treasuries are also considered a safe haven for investors during time of volatility in the stock market, but this week’s sharp rise in yields have made this market unusually perilous.
Yields move in the opposite direction to prices. So as yields have been rising unexpectedly, investors around the world that hold trillions of dollars of Treasuries are seeing their value suddenly decline.
Rising yields on the 30-year long bond have also been historic, analysts said. This bond is considered a particular refuge for pension funds and insurance companies, because they have liabilities that stretch into the future, so they need assets that match that.
“This is not normal,” Ajay Rajadhyaksha, global chairman of research at Barclays, wrote in a report on Friday. Grappling for an explanation, Mr. Rajadhyaksha pointed to speculation by Asian investors who are selling in response to tariffs, as well as the possible unwinding of highly leveraged bets in the Treasury market. “Whatever the reason, right now, bond markets are in trouble,” he said.
Another worrying sign this week has been the decline in the U.S. dollar, which tumbled 0.8 percent against a basket of currencies representing its major trading partners on Friday. Every currency of the group of 10 nations rose against the dollar, further pointing to a move away from U.S. assets.
A weaker dollar at the same time as government bonds and stocks are selling off is a rare combination, given the dollar’s role as the global financial system’s safe haven.
Despite the monthslong slump in the stock market, which is approaching a bear market, it was the bond market looking “queasy” that Mr. Trump said prompted him on Wednesday to pause the worst of his tariffs for most countries.
“President Trump’s trade war, launched on ‘Liberation Day,’ quickly collided with a more formidable force than foreign retaliation: the $27 trillion U.S. Treasury market,” said Matt Eagan, a portfolio manager at fund manager Loomis, Sayles & Company. “As yields surged and liquidity thinned, the bond market began flashing warning signs.”
For investors, the moves echoed the wild price swings from the pandemic-induced sell-off in March 2020 and before that, a bout of volatility in September 2019. Those events spooked investors and prompted rapid intervention from the Federal Reserve to stabilize the market.
This time, the Fed is in a trickier position. The inflationary effect of tariffs warrants the central bank keeping interest rates high. But it would be more supportive to financial markets and economic growth to lower interest rates, something the central bank has so far resisted doing.
On Friday, a widely watched measure of consumer sentiment fell to its lowest level in roughly three years. Expectations for where inflation will be in 12 months time soared, underscoring the Fed’s challenge.
Foreign investors are among the biggest holders of U.S. government debt. Japan is the largest, based on official data, with more than $1 trillion worth of U.S. Treasury debt. The next largest in China, which holds $760 billion of Treasuries, having already reduced its holdings by more than a quarter of a trillion dollars since 2021.
“WAKE UP PEOPLE,” Andrew Brenner, a veteran bond trader and head of international fixed income at National Alliance Securities, wrote in a brief email. “THIS IS FOREIGN MONEY EXITING THE TREASURY MARKET DUE TO TARIFF POLICIES.”
Some analysts and investors fear that a more rapid pace of selling by foreign investors could push U.S. Treasury yields, and with them U.S. interest rates, even higher.
“Picking fights with major trading partners who also finance your debt becomes especially risky with a wide fiscal deficit and no credible plan to rein it in,” Mr. Eagan said.