One of the biggest surprises born out of market turmoil is the sharp rise in US Treasury bond yields despite the recession and growing fears about investors seeking safe investments.
While some of that jump has been reversed, the bond rise has attracted widespread attention. Bond yields usually drop during times of market turmoil or when the US economy is considered slower. Additionally, the increase in bond yields was accompanied by an unexpected slump in the value of the US dollar.
Analysts and fund managers point to several factors that have driven bond yields. In the fundamental aspect, investors are concerned that the implementation of tariffs by the US will lead to increased inflation over the long term or even worse. In the market, hedge funds have settled government bond positions to meet capital and margin requirements.
But most importantly, the changing views among non-US investors about the risks of investing in the US.
“The unpredictability of Trump’s policy makes us more cautious about US bonds that are priced far higher premiums than before,” said Matteo Solin, head of government debt at Generali Asset Management, which views the European core bond market as a “safeteriali Asset Management.”
The extraordinary rise in the Ministry of Finance is yields
Shortly after US President Donald Trump announced tariffs that were much more severe than expected on April 2, bond yields are expected to be as prices rise – the higher the tax, the slower the economic growth. The 2010 Treasury yield fell to 4.01 from 4.20% on Friday, April 4th, April 2nd. However, the following Monday, bond yields began to surge, reaching around 4.58% on April 11th for the decade.
Since then, yields have declined slightly, at 4.33% in 10 years.
However, tensions remain in the $29 trillion US government bond market. Now, the US political premium is incorporated, and will it maintain a higher yield than they have in the past?
According to the global credit team at Algebris Investments, the market needs a credit premium for its US assets. In a note on April 14, they say that some of the Treasury’s increase in yields is purely technical. “Recent developments have caused repatriation from inflated US assets,” he said, warning that “still is an important alarm bell for the administration and the Federal Reserve.”
Is the Ministry of Finance still a safe haven?
Either way, investors are turning their attention to the sustainability of US debt from tariffs and wondering if it is still a safe haven.
“We see similar dynamics in the US UK ‘truss moment’, where we’ve seen buyers attack for several days despite the stock being sold. We sell, especially in Asia.” Hense pointed out that it sells among professional traders who are forced to sell to protect their capital.
In 2022, then Prime Minister Liz Truss announced Her bold mini budgetincluding a series of tax cuts and economic policies that have led to a sharp decline in sterling in the pound against the dollar and an increase in British government bonds as the market responds negatively to increased borrowing.
Hense adds that US banks “do not appear to have an appetite in the face of a statutory liquidity ratio (SLR),” which requires banks to maintain a portion of their sediment in liquid assets in order to ensure stability in their financial system.
He sees the United States as “in a world with high prices and high capital costs,” and “the global dismissal forces should help bonds elsewhere.”
Flights to Eurozone Debts
The spread between the US Treasury in 2010 and Germany’s chest wall in 2010 was expanded by over 50 basis points last week as financial markets saw the well as a safer choice. “Now it’s important to keep an eye on whether Trump and Xi Jinping are sitting to tackle a compromise. Meanwhile, the term premium could continue to accumulate as the two major political parties do not express tension.”
He adds that general asset management remains cautious at longer maturities “considering tariffs and uncertainties injected by German fiscal packages.”
Nicolas Forest, CIO of Candriam, says that as the US remains the world’s leading economy and has the world’s most liquid debt market, “questioning the status of financial liabilities as a safe shelter asset is a remote possibility.” However, he has focused on US CDs (credit default swaps), a financial derivative that allows investors to exchange or offset credit risk, and has increased by 10 basis points since Donald Trump took office.
Karin Kunrath, chief investment officer at Raiffeisen Capital Management, says her team reduced exposure to the US Treasury and supported European government bonds, particularly French and Italian bonds.
“The US administration’s policies are moving in both directions of fuel inflation and curb growth that are against the interests of the US Treasury,” Kunrath said.
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