Why is the Trump administration causing turmoil in the bond markets? | Richard Partington

Government borrowing costs globally have reached their highest levels in decades, fueled by escalating anxiety over the instability of the US bond market. The situation has intensified due to concerns surrounding President Donald Trump's economic policies and his ongoing tensions with Iran, which are contributing to rising inflation expectations. These developments have triggered a widespread sell-off in US Treasury bonds, sending ripple effects through global financial markets. As a result, yields on government debt in the United Kingdom, France, Germany, and Japan have climbed sharply, reflecting heightened uncertainty about the direction of global economic policy. The surge in borrowing costs has been particularly pronounced in the United States, where the yield on the 30-year Treasury bond has surpassed 5%, marking the highest level since 2007. A bond functions as a loan made by investors to a borrower, typically a government or corporation. The yield, which represents the return an investor earns for holding the debt, rises when investor demand declines, pushing bond prices lower. In recent weeks, the US Treasury Secretary, Scott Bessent, announced plans to significantly increase the purchase of long-term bonds in an effort to stabilize investor sentiment. Additionally, Washington coordinated with Tokyo to support the Japanese yen, aiming to prevent excessive volatility in global currencies. Despite these interventions, the effects have been fleeting. On the day of the announcement, yields initially declined, but they rebounded within days, reversing much of the earlier decline. Given the critical role of US Treasury bonds in global finance, the upward trend in US borrowing costs has led to a corresponding rise in yields for other nations. For instance, the UK's 10-year bond yield has approached its highest point since 2008, while 30-year rates have neared levels last seen in 1998. Similarly, Germany's yields have returned to levels observed in 2011, and France's have reached a 16-year high. In Japan, borrowing costs have also hit a peak not seen since 1996. Investor apprehension stems from several key factors. The breakdown in diplomatic talks regarding the US-Israeli conflict with Iran has raised alarms about potential escalations that could disrupt global trade and energy supplies. Simultaneously, the US national debt has crossed the $40 trillion threshold, doubling in size over the past ten years. This massive accumulation of debt has sparked fears that Trump's proposed fiscal policies, characterized by substantial tax cuts and increased government spending, are not sustainable in the long term. Rising oil prices, driven by intermittent conflicts in the Middle East, have further exacerbated inflationary pressures, complicating efforts to manage economic growth. Central banks worldwide are grappling with the challenge of balancing inflation control against the need to maintain stable financial conditions. Analysts such as Albert Edwards of Société Générale suggest that the unpredictability of both the Iran crisis and the Trump administration has created a difficult environment for monetary policymakers. The abrupt change in communication style by the newly appointed Federal Reserve Chair, Kevin Warsh, has also unsettled investors who had grown accustomed to more transparent guidance from previous leaders. Political uncertainties continue to weigh on global markets. Concerns persist that Trump may lack the will to address the nation's growing debt burden. Similar doubts have emerged regarding British Prime Minister Andy Burnham, while France prepares for a major electoral cycle in 2027 amid deepening political divisions. Japan, too, faces internal challenges as it seeks to boost public investment despite already high debt levels and a weak yen. Some experts argue that the recent yen-stabilization measures undertaken by Washington were partly motivated by fears that declining Japanese demand for US Treasuries could undermine the reliability of the US bond market. Prior to the joint intervention, Tokyo had been selling off US government securities to generate liquidity for yen purchases, thereby depressing bond prices and increasing yields.