Breaking bonds
Markets are testing the resolve of US Treasury Secretary Scott Bessent, as the Trump administration's move to impose sweeping tariffs on the rest of the world continues to perplex experts.
There’s a long history of government debt markets revolting in the face of poor policy, from the US “bond vigilantes" of the 1980s and 1990s to the more recent implosion of Liz Truss’ Conservative government in the UK just a few years ago.
It’s a history Scott Bessent is intimately familiar with. That’s why the latest convulsions in global markets will surely be concerning the US Treasury Secretary.
Overnight on Wall Street, the benchmark equity index, the S&P 500, continued its descent towards bear market territory (it has fallen nearly 20% since late February). But the really surprising action was in the bond market, which did not exhibit its usual defensive behaviour and fell in tandem with the stock market. The yield on the benchmark 10 year Treasury note briefly breached 4.5% early this afternoon and is now around 4.43%.
Citi’s chief US economist Andrew Hollenhorst described it as a “mysterious” move, and offered two possible explanations. The first is that investors may be positioning for higher inflation as a result of the Trump administration’s tariffs. The second suggested a possible capital flight by foreign investors. “Most concerningly, this could be an early sign that investors are looking to liquidate positions even in high-quality assets to raise cash.”
