The US administration appears on a collision course with the bond markets as it fails to understand the problem.
- US bond yields have been spiking higher, and other government bond markets have followed suit
- Reassurances on fiscal discipline and inflation control would be the normal route to calm bond markets
- However, the US administration are disinclined to do it, and for the rest of the world, it may be ineffective
It’s been a wild week on bond markets. Yields have been rising, with the US leading the way. The usual assumption would be that governments or central banks would step in to calm nerves, offering reassuring platitudes on inflation and spending. However, it is not clear that this is going to happen this time.
The US 10-year yield is now at 4.78%, 0.8 percentage points higher than at the start of the Iran conflict. The two-year has also spiked higher, and now sits at one percentage point above its February level. The 30-year has seen the smallest moves, but is still around 0.6 percentage points higher. International bonds in the UK, eurozone and Japan have all followed suit.
The normal response in the face of this wobbly sentiment in bond markets would be to offer warm words on fiscal discipline and inflation control. However, there are reasons why this may not happen. Part of the problem is that there is so much debt globally that international buyers are struggling to digest it. It is not necessarily in the gift of individual governments to change this uncomfortable supply/demand dynamic.
Perhaps more importantly, the US doesn’t seem to understand or care about the problem very much. Treasury Secretary Scott Bessent has made a couple of moves with the tools available to him, intervening in the long-dated treasury market and Japanese yen. Neither has been particularly effective, but while the rest of the administration remains committed to the war in Iran, ideologically opposed to tax cuts and poor at making spending cuts, it is all he has.
A ‘normal’ administration would see the looming problem in the bond market, recognise the impact for mortgage holders, commercial borrowers and the wider economy, and take action. However, President Trump’s threats to use the military on the bond market suggests a limited understanding of the gravity of the situation and the tools to resolve it.
The rest of the world has to take its lead from the US treasury market. All they can do is look like the least worst option and hope that increasingly discerning international buyers will pick them over the others. Global policymakers will be crossing their fingers and hoping for a breakthrough on Iran peace talks as the only way out of the current quagmire.
