Bond Watch: how bonds caused Trump to U-turn

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.       

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.            

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Yields up, tariffs down

Bond markets showed once again this week that they are far more powerful and influential than equity markets.

Whereas equity investors simply own shares in businesses,  government bond investors are the creditors to governments. If they lose confidence then they push up the cost of borrowing for governments, which increases costs for them. Therefore a bond market tantrum is far more consequential than a stock market tantrum, as the government itself loses out. 

This is what we saw during a remarkable week of market activity. What started as a very negative stock market reaction to Trump’s tariffs turned into a bond market shock, with US government bonds yields rising significantly even as stocks kept falling.

Normally, when stocks are falling, safe-haven assets such as UK or US government bonds rise in value, causing yields to fall. This is because the default risk on these assets is effectively zero and they pay a reliable income (yields are over 4% currently).

• Bonds bolster portfolios amid equity collapse
• The funds delivering under Trump as US shares drop

However, the yield on the US 10-year bond rose from 4% to 4.3% over Monday and Tuesday this week. The 30-year US Treasury yield leapt to 5% as investors dumped US government bonds.

There are a few reasons for the sell-off. The first is that investors were forced to sell assets that had previously held their value in order to raise cash. The second is that investors were losing confidence in the US government.

Another reason could be that China deliberately sold US bonds to put pressure on the government. One more cause of the sell-off was that investors were reassessing their views on inflation and pricing in fewer interest rate cuts.

Rising US bond yields caused other bonds to fall in value, including gilts, where the 10-year now pays 4.7%.

Rising yields provoked the U-turn from Trump – he announced a 90-day pause on tariffs apart from on China. This sparked a big jump in shares, but bond markets only moved up slightly.

While the White House sought to frame the new policy as the “art of the deal”, in fact it is far more likely that the bond market forced him to make the change.  

Deutsche Bank strategist Jim Reid said: “Trump suggested that the decision to delay tariffs had been made yesterday morning as people had been ‘a little bit afraid’. And while commerce secretary Howard Lutnick later denied that the move came in response to market pressure, Trump’s comments suggested some sensitivity to the market stress, as he said that ‘The bond market is very tricky’ and ‘I saw last night where people were getting a little queasy’.”

What are the best alternatives to holding cash?

I hosted a webinar this week with three fixed-income investors about the best alternatives to holding cash in your accounts. Ranging from multi-asset perspectives, to the appeal of money market funds and gilts, and the role of short-dated corporate bonds, we discussed how to generate the best return for the lowest risk.

Watch here to learn how to make your cash work harder for you, why gilts can offer a generous tax break, and why money market funds really are a safe investment option.