Recently, the U.S. government's excessive tariff policies, particularly the increased tariffs on China, have directly impacted international financial markets, leading to a rare simultaneous decline in U.S. stock, bond, and currency markets. Notably, from early to mid-April, the yield on the 10-year U.S. Treasury rose sharply from 4.01% on April 4 to 4.49% on April 11, marking the largest weekly rise since the "9/11" events of 2001. This spike in yields has sparked widespread concerns globally about systemic risks in the U.S. bond market, with the sharp decline in Treasury prices being the main driving force.
This phenomenon is primarily influenced by the following four factors:
First, the excessive tariffs by the U.S. have raised expectations of re-inflation. The market predicts that if U.S. tariffs on China are increased to 245%, it would drive up the prices of imported goods, directly affecting the living standards of low- and middle-income groups, while also heightening U.S. inflation expectations. This rise in inflation expectations constrains the Federal Reserve's room for interest rate cuts, thus pushing up long-term Treasury yields.
Second, foreign investors' willingness to buy U.S. bonds has significantly decreased. As geopolitical tensions intensify, European institutional investors have reduced their investment in dollar-denominated assets. The depreciation of the U.S. dollar index and concerns over the sustainability of the U.S. fiscal deficit have heightened market worries, further diminishing the interest of foreign investors in U.S. Treasuries, leading to a rise in long-term Treasury yields.
Third, the surge in U.S. Treasury yields has prompted the rapid unwinding of Treasury basis trades. The U.S. bond market used to be an active venue for arbitrage, with many investors leveraging to conduct spot and futures arbitrage trades. However, with the significant drop in Treasury spot prices, arbitrageurs were forced to unwind positions, resulting in large-scale Treasury sales, pushing long-term interest rates even higher.
Lastly, the reputation of U.S. bonds as a global safe asset has been tarnished. Stephen Milan, the chairman of the White House Council of Economic Advisers, suggested that in the future, the U.S. government will mandate that foreign investors convert their holdings of U.S. Treasuries into ultra-long-term low-interest bonds and restrict investors from selling these bonds directly in the market. If foreign investors do not "cooperate," the U.S. will impose high taxes on their investment returns. This approach is viewed as financial coercion, severely eroding the credibility of U.S. bonds and global investors' confidence, causing foreign sovereign investors' willingness to purchase U.S. Treasuries to decline, further driving up Treasury yields.
As U.S. Treasury yields continue to climb, the U.S. government's pressure to repay principal and interest will significantly increase, and the fiscal deficit issue will further deteriorate. At the same time, the U.S. will be forced to issue new debt at higher costs, undoubtedly adding to its debt burden. In this situation, global investors may turn to other safe assets, further weakening the market position of U.S. bonds and posing a threat to dollar hegemony.
