U.S. bond sell-off drives market worries around the world
Bonds usually a safe haven when markets are uneasy — but investors were selling them on Wednesday
U.S. government bonds underwent a big sell-off early Wednesday, signalling investors were dumping the usually safe assets as tariff turmoil continues to rock the world.
After approaching 4.5 per cent in the morning, the yield — or interest rate on bonds — on the 10-year Treasury note pulled back to 4.37 per cent following U.S. President Donald Trump's announcement of a 90-day pause on tariffs for most countries and a 125 per cent rate for China.
But that's still up from 4.26 per cent late Tuesday and from just 4.01 per cent at the end of last week, and the moves in the bond market still may indicate economic stress.
These bonds, which are the bedrock of the global financial system, are typically seen as a safe place for investors to park their money. They are essentially loans to the U.S. government, made by the investor who holds the bond.
They're typically seen as the safest bonds in the world because the chances that the U.S. government would default on the loan is virtually inconceivable.
In times of uncertainty, like when the stock market makes wild swings as it has been the past few days, investors usually reach for U.S. government bonds because they're safe. But today, investors were selling them as the U.S. continued to create unease with broad tariffs.
"The U.S. government is the source of instability … nobody trusts that the White House knows what it's doing," said Moshe Lander, a professor of economics at Concordia University in Montreal. "People are racing away from the source of instability."
A general lack of confidence is the main reason economists are pointing to for the slump in the bond market.
Some are also pointing to China — which owns a massive amount of U.S. bonds — saying it's possible the country could have sold some of them in order to intentionally make things harder for the U.S. government, says Joseph Steinberg, an economics professor at the University of Toronto.
But without real-time data to see who is selling and buying bonds, it's unclear whether this is actually happening.
Even after Trump announced the pause on Wednesday, Steinberg says it seems like investors are still looking away from U.S. bonds because the announcement merely kicks the tariffs down the road, rather than finding a stable resolution.
Because yields are an interest rate, their rise can filter across to corporate loans and mortgages, meaning what happens in bond markets can cause economic damage to businesses and households.
"We could definitely expect to see interest rates on some mortgages in Canada go up," Steinberg said. While variable-rate mortgages are tied to the Bank of Canada's lending rate, fixed-rate mortgages are determined by banks, which use the U.S. government bond yield in their calculations.
The increase in yields would also make a recession harder to respond to, Steinberg says. He anticipates central banks would want to lower interest rates during a recession, but if the U.S. government yields remain high, that's harder to do.
Following the chaos in the bond market, Finance Minister François-Philippe Champagne and his Japanese counterpart, Katsunobu Kato, shared concerns about the U.S.'s slate of tariffs in a phone conference, according to the ministry.
Canada is the current chair of the G7. The ministry says Canada is working with Japan and the European Union to maintain global stability in financial markets and the financial system.
In past episodes of market upheaval, G7 finance chiefs have often collaborated on messaging and actions to soothe markets and ensure the smooth function of the financial system.
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With files from The Associated Press and Reuters
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