The Day Investors Lost Faith In US Treasuries

The willingness of lenders to lend money to the US government to finance its operations i.e. their willingness to purchase Treasuries, decreased significantly on Friday, pushing interest rates much higher. That is a huge problem since the US is $29TN in debt to external investors, both domestic and foreign.

The interest rate that the U.S. government pays to borrow money by issuing Treasury securities (the Treasury Yield) has increased sharply since Trump’s “Liberation Day” and the increase in Tariffs - back to 2008 crisis levels. And the rate would be far higher had the US central bank (the Federal Reserve or “FED”) not stated it “would absolutely be prepared” to deploy its firepower to stabilise financial markets should conditions become disorderly.

It is usually only large scale trades that move the market. Now even relatively small trades are shifting it significantly. And the ease with which investors can buy and sell Treasuries without moving prices is what is meant by “liquidity.” And, when liquidity if reduced markets become more fragile.

Treasuries are usually considered safe investments, and investment in them usually increases when there is an economic crisis. Faced with the crisis caused by Trump’s tariffs the markets are not responding in the usual way. Why? Because investors have lost faith in what has traditionally been the strongest bond market in the world. And that is the reason Trump had to act and announce his 90 day ‘pause.’ Or, to put it another way, his policy has already backfired spectacularly.

Katie Martin, a Financial Times Columnist thinks things could get a lot worse - and quickly. She points to, “The concern now among bankers and hedge fund managers is that something, somewhere could break.”

With Bond yields back to levels last seen before the 2008 Global Banking Crisis, she may well be right.

It is also worth considering the fact The U.S. government is facing a massive refinancing challenge. By the end of 2026, it needs to refinance over $9 TN in maturing Treasury bonds, most of which were issued when interest rates were near zero. Anyone struggling to re-negotiate a fixed term mortgage they took out when interest rates were very low will know what it means to see a spike in interest rates when they come to re-mortgage.

Also take note of who the largest lenders to the US Treasury are:

Some commentators proposed that Trumps Liberation Day strategy was all about trying to cause a crisis that produced a rush of investment into treasuries, thereby reducing the interest earned on them, to make the refinancing of the nearly $9TN less painful. As already stated, if that were the case, it has backfired massively.

The Japanese, Chinese and all other nations who have been watching what has been going on may well feel they can play tough in tariff negotiations now. The Chinese and Japanese especially. Trump’s negotiating hand has been significantly weakened by the significant rise in interest payments on US Treasury debt.

Trump would be very foolish to reinstate the tariffs after the 90 day pause and risk further increasing the interest rates on US government debt, which would further reduce liquidity and make the markets even more fragile. But might be use the wrecking ball?

Conclusion

Just before "Liberation Day" I posted article with the prediction that "A Black Day Commeth." I suggested it might even be "Liberation Day." Whilst that had predictably dire consequences it was not the Black Day that I was speaking of, but it may come to be seen as a milestone towards it. That really depends what Trumps next move is, or whether or not he gets constrained.