LONDON, April 14 (Reuters Breakingviews) - It’s too soon to tell whether the recent selloff in U.S. government debt reflects an exodus of overseas investors. Yet there are early signs that something is afoot. The sheer scale of possible future moves makes it a scenario that investors – and Uncle Sam – must contemplate.
The 10-year U.S. Treasury bond was trading with a yield of 4.44% by late Monday morning in Europe. That’s slightly lower than the 4.5% level at which it closed on Friday, but still far above the sub-4% levels seen as recently as April 4. Last week represented the biggest weekly rise in the 10-year yield, which corresponds to a lower price, for more than 20 years.
It’s somewhat surprising that the world’s preeminent risk-free asset has weakened rather than strengthened during the recent turmoil triggered by President Donald Trump’s April 2 announcement of bespoke tariffs on U.S. trading partners. In theory, higher long-term economic growth or inflation would justify increased borrowing costs. That seems unlikely in this case. Less global trade will weigh on growth, while longer-term measures of market inflation expectations, like the 10-year breakeven rate, have dipped slightly in April.
Forced selling by over-levered hedge funds has not helped. If that leads to a disorderly market for U.S. government bonds, Federal Reserve Chair Jerome Powell could step in with emergency asset purchases, just as the Bank of England did during the UK bond-market crisis of 2022.
An arguably scarier possibility from the U.S. government’s perspective is that trade-policy chaos has scared overseas investors away from U.S. financial assets. Official data releases, are slow, so there’s only circumstantial evidence so far. But the fact that the U.S. dollar has weakened by almost 5% in April against a basket of U.S. trading partners’ currencies – even as the yield on offer to buyers of government bonds was rising – suggests selling pressure for dollar-denominated assets. Other typical safe havens like German, Swiss and Japanese government bonds have moved in the opposite direction from U.S. sovereign debt.
International money managers – from Dutch pension funds to the Chinese government and Japanese insurers – collectively owned Treasury bonds worth about $8.5 trillion in January, according to U.S. government data, opens new tab, or 30% of SIFMA’s most recent estimate, opens new tab of the total value of the securities in issue. If global investors notch down their allocations, yields have a long way to rise.
Foreigners have also binged on U.S. stocks in recent years. UBS analysts recently estimated that a 5% reduction in non-U.S. investors’ American assets, across both bonds and stocks, could create about $700 billion of dollar selling pressure. That’s equivalent to two-thirds of the U.S. current account deficit and would make the recent turmoil look like child’s play.
CONTEXT NEWS
United States 10-year government bonds were trading with a yield of 4.44% as of 1038 GMT on April 14, down only slightly from 4.49% when U.S. markets closed on April 11, according to LSEG data. The 10-year Treasury yielded less than 4% as recently as April 4.
The U.S. dollar index, which measures the greenback’s strength against a range of trading partners’ currencies, was at 99.44 on April 14, down 4.6% since April 1.
