One of the biggest surprises to come out of the market turmoil has been the sharp rise in US Treasury bond yields despite rising fears of a recession and investors seeking safe-haven investments. Some of that jump has been reversed, but the rise in bond yields, triggered by a selloff in US government debt, gathered widespread attention.
Usually in times of market turmoil, or when the US economy is seen as slowing, bond yields fall as investors buy Treasuries. In addition, the rise in bond yields was accompanied by an unexpected slump in the value of the US dollar, which also tends to be a safe-haven in times of stock market downdrafts.
Analysts and fund managers point to several factors that drove bond yields higher. The first set be seen as quantifiable. Investors are worried about the inflationary impact of tariffs. For example, Morningstar senior US economist Preston Caldwell sees tariffs adding 0.6 percentage points to inflation in 2025 and 1.3 points in 2026. On Wednesday, Federal Reserve chair Jerome Powell said that “the level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
On the market technical side, hedge funds liquidated government bond positions to meet capital and margin requirements.
But more significant could be a worsening view among non-US investors about the risks of investing in the United States in the wake of President Trump’s unleashing of an aggressive trade war against the country’s biggest trading partner and allies. Particularly frustrating has been the near daily changes and reversals in the tariff regimes that Trump himself has announced.
“The unpredictability of Trump policies makes us more cautious toward US bonds that are now pricing a much higher premium than before,” says Matteo Solin, head of government bonds at Generali Asset Management. He sees the European core bonds market as a “safer spot.”
The Unusual Rise in Treasury Yields
Immediately after US President Donald Trump announced far harsher tariffs than many observers expected on April 2, bond yields fell and prices rose on expectations that they would slow economic growth. The yield on the 10-year Treasury dropped to 4.01% on April 4 from 4.20% on April 2. However, the following Monday, bond yields began to spike, with the 10-year hitting an intraday high of roughly 4.58% on April 11. That half-point rise was the largest weekly gain since 2001.
Since then, yields have fallen back slightly, with the 10-year Treasury at 4.33%. However, tensions remain in the $29 trillion US government bond market. Is there now a US political premium being built in that will keep yields higher than they might have been in the past?
According to Algebris Investments’ global credit team, the market is requiring a credit premium on US assets. In a note on April 14, they say that part of the increase in Treasury yields is purely technical, “as recent developments are triggering some repatriation from inflated US assets,” cautioning that “still, it is an important alarm bell for the administration and the Federal Reserve.”
Are Treasuries Still a Safe Haven?
In any case, investors have shifted their attention from tariffs to the sustainability of US debt, and they are wondering if it is still a safe haven. “We largely see similar dynamics to the UK’s ‘Truss moment’ for the US, where we have seen days of buyers strike despite equities selling off. Non-domestic investors, and in particular Asia, is selling,” says Kaspar Hense, senior portfolio manager at RBC BlueBay. He points to professional traders who were forced to sell to protect their capital.
In 2022, then-UK Prime Minister Liz Truss unveiled her bold mini-budget, which caused a sharp fall in the pound against the dollar and an increase in UK government bond yields as markets reacted negatively to the increase in borrowing.
Hense adds that US banks “do not appear to have appetite [for US Treasuries] either, even in the face of statutory liquidity ratios,” which require banks to keep a portion of their deposits in liquid assets to ensure the stability of financial systems. He sees the US “in a world with higher prices and higher costs of capital,” and believes that “global disinflationary forces should help fixed income elsewhere.”
The Flight to Eurozone Bonds
Last week, the spread between 10-year US Treasury and 10-year German bund yields widened by more than 50 basis points, as financial markets viewed the bund (the eurozone’s benchmark security) as a safer choice. “It’s now important to monitor whether Trump and Xi Jinping will sit down to work on a compromise. Meanwhile, the term premium could keep building up as the two main parties don’t de-escalate the tension,” Solin says. He adds that Generali Asset Management remains cautious on longer maturities, “considering the uncertainty injected by tariffs and German fiscal package.”
Candriam CIO Nicolas Forest says the US remains the world’s leading economy and has the most liquid debt market, so “a questioning of the status of Treasury bonds as safe haven assets is a remote possibility.” However, he notes the US credit default swap (financial derivatives that allow investors to swap or offset their credit risk) has increased by 10 basis points since Donald Trump took office.
Raiffeisen Capital Management CIO Karin Kunrath says her team has reduced their exposure to US Treasury bonds, favoring European government bonds, particularly French and Italian ones. “The US administration’s policies are moving in directions that both fuel inflation and curb growth, a dynamic that runs counter to the interests of the US Treasury,” she says.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
