There isn't much certainty in the money world, but this has traditionally been one of them. When life is scary, people take shelter to American government bonds.
Investors buy the US Treasury Department on the assumption that financial panic, war, natural disasters – the federal government will withstand its debt and make its bonds closest to the contract.
But last week's disruption in the bond market revealed the extent to which President Trump shattered his belief in his fundamental proposition, and challenged the previously unconvincing solidity of the US government's debt. His trade war now focuses heavily on China – raised the prospect of a global economic downturn while undermining America's credibility as a responsible steward of peace and prosperity.
“The whole world has decided that they don't know what the US government is doing,” said Mark Bryce, a political economist at Brown University and co-author of the upcoming book, Inflation: A Guide to Users and Losers.
The erosion of faith in governance in the world's largest economy appears to be at least partially responsible for recent sharp sales in the bond market. If a large number of investors sell bonds at once, the government forces others to offer higher interest rates to tempt others to buy the debt. And it tends to boost interest rates across the economy and increase payments on mortgages, car loans and credit card balances.
Last week, closely monitored 10-year Treasury yields skyrocketed from under 4% to around 4.5%. This is the most prominent spike in nearly a quarter century. At the same time, the value of the US dollar has declined despite tariffs expected to push it up.
Other factors also cover the description of the bond sale. Hedge funds and other financial players have sold Holdings to withdraw complex trades that seek to profit from the gap between the existing prices of bonds and bets on future value. Speculators have dropped bonds in response to losses from stock market plunges and are trying to collect cash to stop bankruptcy.
China's central bank, which commands a $3 trillion foreign exchange reserve, including $761 billion in US Treasury debt, fears it could be sold as a form of retaliation against US tariffs.
Given that many factors occur at once, a rapid increase in government bond yields register as similar to when medical patients learn that their red blood cell count is declining. There may be many reasons for the decline, but none of them is good.
One reason appears to be an effective downgrade of American locations in global finance, from safe shelters to sources of volatility and danger.
As Bryce said, the Treasury bill was left to the so-called immutable assets of information, solid investments regardless of news – to “risk assets” vulnerable to being sold when fear is taken away from the market.
The Trump administration supports tariffs in the name of returning manufacturing jobs to the United States, claiming short-term turbulence followed by long-term benefits. But as most economists explain it, world trade is hampered without a consistent strategy. And the chaotic way that tariffs were administered – frequently announced and then suspended – undermined confidence in the American system.
For years, economists have been worried about a sharp decline in their willingness to buy and hold US government debt, leading to a sharp and volatile increase in American interest rates. Many indications may unfold the moment.
“People are nervous about lending us money,” said Justin Wolfers, an economist at the University of Michigan. “They say, 'We've lost faith in America and the American economy.' ”
For Americans, that reassessment could revoke a unique form of privilege. As the US has long served as a safe port for the global economy, the government has ensured that debtors discover debts at lower interest rates. It reduced the costs of mortgages, credit card balances and car loans. And that allowed American consumers to spend relatively abandoned.
At the same time, foreigners who purchase assets controlled by the dollar pushed up the value of American currency and made products imported into the US cheaper on the terms of dollar.
Critics have long argued that the model is unsustainable and disruptive. At the expense of domestic manufacturing jobs, foreign dollars flow to dollar assets allowed imports (benefits to consumers, retailers, and financial operators) that benefited consumers, retailers and financial operators. Chinese companies have gained control in major industries, and Americans rely on distant enemies of important commodities like basic medicines.
“The role of the US dollar as a major safe currency has made America a major enabler of global economic distortions,” economist Michael Pettis wrote last week in his opinion from the financial era.
However, economists generally embrace so-called industrial policies to promote the development of new industries, and therefore generally stipulate a step-by-step process of coordination. This thinking has energised the Biden administration's economic policies. This includes tariffs on the Chinese industry to protect American businesses, but has gained momentum in industries such as clean energy technology.
Encouraging the American industry requires investments that themselves require predictability. Trump warns businesses that the only way to avoid his tariffs is to raise trade protectionism to a level they haven't seen in over a century, while establishing factories in the United States.
Even the sudden decision from the White House to suspend tariffs for most of all trading partners except China failed to remove the sense that a new era is ongoing.
It is almost nothing new to Trump's not succumbing to diplomatic obstacles. His making America great again is concentrated on the notion that as the world's largest economy, the United States has the power to impose its will.
But pullbacks in the bond market prove to be shocking how far this principle has been extended. Trump has been broken by 80 years of faith in the benefits of global trade, including economic growth, low-cost consumer goods and reduced risk of war.
The unequal spread of trade interests is now true among economists. Anger over unemployment in the industrial community helped bring Trump to power while changing the politics of trade. However, many economists say the trade war is likely to damage American industry assets even more.
Tariffs threaten existing employment in factories that rely on imported parts to manufacture products. The taxation is set at a rate that appears to have been picked randomly, the economist said.
“What I really didn't like about the market was the random crazy mathematics of tariffs,” said Simon Johnson, a Nobel Prize-winning economist at the Massachusetts Institute of Technology. “They didn't know what they were doing and seemed to care. It's a whole new level of insanity.”
The imminent consequence of higher interest rates on US Treasury is the increase in what the federal government must pay creditors to maintain its debt. It will be cut to funds available for other purposes, from schools to bridge maintenance.
The broader effect is difficult to predict, but it could potentially move into a recession. If households are forced to pay more on mortgage and credit card bills, they will likely limit their spending and threaten them, big or small. The company will then prohibit employment and expansion.
The chaos in the bond market is an indicator that investors are seeing signs that they are already rolling out this negative scenario, and in itself is the source of future distress through higher borrowing rates.
For years, foreign holders of American bonds have been trying to diversify into other reservoirs for savings. Still, the dollar and US government bonds remain the ultimate repository.
Europe and its common currency, the euro, appears to be strengthened as part of the global financial realm currently subject to adult supervision. However, Germany's solid resistance to issuing debt limits the availability of bonds for investors seeking another place to entrust savings.
That may change now, Brown Economist Bryce proposed. “If Europeans decide to issue a 'bond of sane', the world might jump on it,” he said.
The Chinese government has long been trying to promote the currency location, the yuan. However, foreign investors see China as a small example of transparency or the rule of law, and its usefulness is limited as an alternative to the US.
All of this leaves the world in a place of confusion. The old sanctuaries don't seem so safe anymore. However, other places don't seem to be able to stand right away.
