Global bond markets were gripped by volatility on Wednesday, as the rollout of U.S. President Donald Trump’s reciprocal tariffs left investors scrambling to find safety as global equity markets resumed their sell-off.
U.S. Treasurys sold off on Wednesday as a new wave of duties came into force, with the yield on the U.S. 10-year Treasury last seen trading 12 basis points higher at 4.384% and the 2-year was 5 basis points higher at 3.783%.
Bond yields and prices move in opposite directions, as investors demand a lower price on the bond and a higher return on their loan to lend to governments that they see as riskier holdings.
Across the Atlantic, longer-dated European government borrowing costs also rose. By 11:55 a.m. in London, the yield on French 10-year government bonds was nearly 3 basis points higher, the Italian 10-year yield was up 5 basis points and the yield on British 10-year government bonds, known as gilts, were up 7 basis points. The 30-year gilt yield jumped 15 basis points to its highest level since 1998.
Germany bucked the trend as its 10-year bund, seen as a benchmark for the euro zone, traded marginally lower through the morning before moving flat.
Some shorter-dated bonds in Europe meanwhile rose in value. The yield on 2-year government bonds in France, Italy and Britain were 6, 4, and 3 basis points lower, respectively. Yields on Germany’s 2-year government bonds, known as bunds, shed 8 basis points, and the yield on 5-year bunds moved 4 basis points lower.
“One factor people are speculating about on Treasurys is around the ongoing theme of a move away from the U.S. dollar, of it becoming less trusted,” Ken Egan, senior director for sovereigns at credit rating analysis agency KBRA, told CNBC in a call on Wednesday. “If you follow that through, one way that could manifest is structural holders of debt, reserve managers in China, could move away from Treasurys in response to policy moves from the U.S.”
‘An alternative safe haven play’
Egan argued that investors are taking a step back from U.S. Treasurys, typically seen as a traditional safe haven assets, given the volatile geopolitical climate.
“Forces are at odds, because you have inflationary concerns and a rapid repricing of Treasurys on those, but on the other side you have weak demand and growth, and more rate cuts being priced in,” he told CNBC.
German bonds were out of sync with the long-dated market on Wednesday because it is being seen as an alternative safe haven play, as investors — still stunned by the scale of Trump’s actions — wait for more clarity, he said.
Egan also noted that European bonds with shorter maturity terms were rising in value as they are more policy-sensitive and traders want to lock in returns now, as more global interest rate cuts are being priced in.
“Traditionally you might have gone into the U.S. during a period of volatility, but this is a U.S. story. Germany is benefiting from a wider flight to quality. The country has already told the market what it’s going to do, there’s clarity about what its path will look like,” Egan added, referencing Berlin’s recent passing of a huge fiscal package across infrastructure, climate and defense.
In a note on Wednesday, Freya Beamish, chief economist at TS Lombard, likened the spike in U.S. government borrowing costs to the U.K.’s 2022 “mini budget” crisis, which rocked the country’s pension funds and led to emergency market intervention by the Bank of England.
“The really worrisome thing about negative supply shocks is that they push up inflation and destroy demand at the same time, destroying the hedging capacity of bonds for equities. They are capital destroyers,” she said.
“The issue here is not who is right or wrong about the long-term effects of tariffs. It is about investor perceptions over the probability of these types of shocks. And once this narrative starts to be priced in, the risk is of financial accelerators kicking in, as happened in the UK with the LDI crisis.”
Alex Brazier, global head of investment and portfolio solutions at BlackRock, told CNBC’s “Squawk Box Europe” on Wednesday that recent months had been a reminder for investors that “we’re in a new world.”
“This is not a situation where a classic broad stock index, broad bond index, set-and-forget portfolio is ideal,” he said. “Looking at the fundamentals of the U.S. bond market here, we’ve got some technicals going on, we’ve got early signs of stress in the swap market, that bears closely watching.”
Meanwhile, Susannah Streeter, head of money and markets at Hargreaves Lansdown, told CNBC via email on Wednesday that some European government bond yields had moved upward despite rising expectations of interest rate cuts in the region.
“This is likely to be because investors are selling out their positions in European bonds to buy U.S. Treasuries given that they are offering higher yields,” she said. “However, U.S. Treasury yields are falling back again, and the situation remains very fluid.”
