LONDON (Reuters) - U.S. President Donald Trump decided to delay the imposition of high tariffs on numerous countries after the financial markets were disrupted, particularly the $29 trillion Treasury market which experienced a significant downturn.
Trump expressed on Wednesday that the bond market had recovered satisfactorily following concerns from investors due to his tariff declarations. He stated that "The bond market now looks good," to journalists.
This market turmoil demonstrates the significant influence of government bond markets in influencing policymakers, with the concept of bond vigilantes potentially resurfacing in recent times.
The recent events in the bond markets involved intense selling pressure, causing a surge in 10-year borrowing costs, a key element of the global financial structure. Initially, 10-year bond yields experienced a substantial increase, on track for the largest weekly rise in over ten years. By Thursday, the yields had decreased to 4.27% from the peak of 4.51% observed on Wednesday.
This sudden development marked a deviation from the initial decline prompted by Trump's tariff announcements, which heightened recession concerns and projected rate reductions.
The significance of the Treasury market lies in its critical role in ensuring financial market stability domestically and internationally. Governments utilize this market to generate revenue for expenditures through taxation or borrowing. A bond market selloff not only increases borrowing costs for the government but also affects mortgages and corporate loans, creating a ripple effect of economic repercussions.
For instance, the 30-year mortgage rate is linked to the 10-year Treasuries, which experienced a notable surge on Wednesday; however, the situation calmed down after the tariff postponement.
Moreover, the surge in U.S. corporate bond yields, related to the Treasuries, was evident as junk bond yields closed significantly higher than previous levels, impacting borrowing costs globally. Countries with substantial debt burdens such as Japan and Britain also faced a rise in bond yields, posing additional economic challenges.
The stress on the global financial markets due to these events highlighted the interconnectedness and vulnerabilities of the financial system to policy decisions and market fluctuations.