Confidence in the US economy is plummeting as investors dumped government debt amid growing concerns over the impact of Donald Trump’s tariffs, Governments sell bonds – essentially an IOU – to raise money from financial markets for public spending and in return they pay interest…
The US does not normally see high interest rates on its debt as its bonds are viewed as a safe investment, but on Wednesday rates spiked sharply to touch 4.5%.
The rise came after Trump pressed ahead with sweeping tariffs on goods being imported into the US, while Washington’s trade war with China escalated further – although Trump on Wednesday did put a 90-day pause on higher tariffs for some countries, After the US implemented a 104% tariff on products from China at midnight on Wednesday, Beijing hit back with 84% levy on American products. Trump later raised the tariff on China to 125%.
Stock markets have been falling sharply over the past few days in reaction to the escalating global trade war and fears of tariffs leading to higher prices, although US stocks soared when Trump announced the 90-day pause and a lowered 10% reciprocal tariff for other countries.
However, the sale of bonds in the US poses a major problem for the world’s biggest economy, The interest rate – or yield – for US government borrowing over 10 years has spiked sharply in the past couple of days from 3.9% to 4.5%, the highest level since February.
The rise has spooked economists because US bonds are traditionally seen as a so-called safe haven for investors to put their money in times of financial turmoil, “Rising bond yields mean higher costs for companies to borrow, and of course governments too,” said Laith Khalaf, head of investment analysis at AJ Bell.
“Bonds should do well in times of turmoil as investors flee to safety, but Trump’s trade war is now undermining the US debt market,” he added.
‘US recession a coin toss’
JP Morgan, the investment banking giant, has raised the likelihood of a US recession from 40% to 60% and warned that American policy was “tilting away from growth”, Simon French, chief economist at Panmure Liberum, told the BBC that the Fed could decide to cut interest rates in a bid to protect US jobs by making it easier for businesses to borrow cash as they face higher costs from tariffs.
