April 11, 2025 • 9 mins
US Treasury bonds have long served as a refuge for investors during times of panic. But as President Donald Trump unleashes an assault on global trade, their status as the world’s safe haven is increasingly coming into question. Yields, especially on longer-term debt, have surged on the tariff announcements, raising fears that key foreign buyers could take their money elsewhere, in a form of buyers' strike. Our Managing Editor for FX and Rates, Rachel Evans, joins host Stephen Carroll to discuss.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and
this is Here's Why, where we take one new story
and explain it in just a few minutes with our
experts here at Bloomberg. Bond market is very tricky.
Speaker 2 (00:21):
I was watching it, but if you look at it now,
it's beautiful. The bond market right now is beautiful.
Speaker 1 (00:29):
But yeah, I saw last night where people were getting
a little queasy. Donald Trump's trade tariffs have investors on edge.
The wild swings in prices of US government debt and
the volatility and borrowing costs that comes with it have
been the most glaring example of a loss of confidence
in what's long been considered a safe investment. Foreign investors
(00:49):
hold trillions of dollars in treasuries, so what happens if
they decide to put their money elsewhere.
Speaker 2 (00:55):
Japan and China are two of the largest holders of
US treasuries, and if they decide that they don't want
to show up an auction, it's going to be very tricky.
Speaker 1 (01:03):
I think what the treasury market is telling us is
that there is not a lot of balance sheet availability
to absorb all this treasury selling. Twenty twenty five feels
like a US driven situation and willingness on the part
of foreign investors to liquid date dollar assets. Treasuries are
part of that complex. Here's why America's debt is a
trade war victim. Our managing editor for FS and Rates,
(01:25):
Rachel Evans, joins me. Now for more. Rachel, First of all,
how important are foreign buyers for US government borrowing?
Speaker 2 (01:32):
Very important. They comprise about a third of ownership for
the treasury market, so it's a significant piece of the pie.
And there's some analysis out there from Barklay's that that's
interesting that suggests that last year so foreign buyers were
really taking down like a large chunk of the debt
issuance that the US was putting out there. These are
all different types of owners. You've got pension funds, you've
(01:54):
got insurers, and you've also got central banks that are
sticking these into their reserves theoretically as kind of a
pillar of stability for themselves.
Speaker 1 (02:01):
The term buyer strike might sound quite encendry in a
lot of ways, but what would a buyer's strike look
like in the US treasury markets?
Speaker 2 (02:10):
Yeah, I think, simply put, and we haven't really seen
this necessarily, so it's kind of hard to exactly what
it would look like, but simply put, you would see
yields continually rising day after day, and particularly at the
long end. When we look at kind of the division
of the types of treasuries that are owned by foreign buyers,
it tends to skew towards longer dated debts, so thirty
(02:32):
year debts. So if you're starting to see yields really
kind of rocketing up at the long end in thirty
year debt, boring costs really sawing their day after day
after day, that would be an indication that you're starting
to see foreign buyers pulling back, and.
Speaker 1 (02:45):
So far, no sign of that that we've seen in markets.
Speaker 2 (02:49):
We've seen little dribs and drabs, but we haven't kind
of seen the sort of the prolonged action that you
would necessarily sort of view as being kind of a
bier strike. We had a slightly iffy auction earlier in
the week where we saw year debt sort of struggling
to find as much demand as it might sometimes, and
we've seen steeper yield cup so that the back end
of the curve selling off more those yields on thirty
(03:09):
year debt rising more so that does indicate sort of
the potential for demand overall is kind of diminishing a
little bit. And I was also taken by some analysis
that our colleague Cameron Christ did that suggested that since
Trump's inauguration, we've actually seen most selling outside of US hours.
So that tells you that in terms of who is
doing the selling, that it is often coming from overseas.
(03:32):
So there's been these kind of little hints of unease
I think amongst kind of foreign investors, but we've not
seen kind of the action that would suggest sort of
a or bona fide by a strike that's really going
to be there for the longer term.
Speaker 1 (03:45):
So we're determined to sort of pullback that we would
term a strike in this context. I mean, if it
were to happen, theoretically, what would a last of foreign
interest in US debt mean for the US government?
Speaker 2 (03:56):
I mean very simply higher yields, so higher borrowing cost
for the US government. They would need to pay more
to refinance their debt and to borrow new money. That
would also have a ripple through effect to things like
mortgage rates, which track ten year yields and are therefore
would also be going up so you'd be getting kind
of that ripple through effect from the US's borrowing costs
through to sort of the average Americans foreign costs and
(04:18):
their debt load. You'd also potentially see the US government
have to rethink how it sells debt. At the moment,
you know, you have kind of a balance between sort
of short dated bonds and longer dated securities that's kind
of set by Treasury to sort of tap into investor interest. Now,
Scott Bessen has said that he would like to move
away from having so much debt at the short end
(04:38):
of the curve, so many bills. He wants more longer
term debt. However, if your cost of longer term debt
is skyrocketing upwards, that becomes very very difficult, and the
need to really issue more short data debt that you
can pay less on becomes higher. So I think you
just sort of have to see that the government recalibrating
how it sells debt in order to make sure that
it's tapping the investors that do stick around.
Speaker 1 (05:00):
Would the Federal Reserve get involved in this, Whether there
be a moment at which something would get so dramatic
that the Central Bank would have to act.
Speaker 2 (05:06):
So the central Bank has it's obviously economic mandate where
it's thinking about inflation and growth and jobs, so this
doesn't necessarily impinge on that. They're also looking at kind
of market functioning. So I think where the FED might
get involved is where if you see some dislocations and
some breakages and how the market functions.
Speaker 1 (05:24):
Being extremely abnormal essentially exactly.
Speaker 2 (05:26):
I mean, this is sort of what we saw back
in like March twenty twenty, when we saw kind of
a huge liquidation of pretty much every assets but a
dash for cash, and that really kind of sort of
broke some of the plumbing in the markets. We saw
a lot of hedge fund trades and winding very very rapidly,
and the FED did step in then with various kind
of facilities to try and kind of ease some of
(05:47):
the liquidity constraints that were really sort of upsetting the
market at the time. So there has been some sort
of conversation in markets about, you know, whether the FED
could intervene or how they'd intervene. So speculate that maybe
they could step in and do sort of emergency qe,
you know, stepping into buy bonds. Others say, no, that's
not likely, but maybe we could see sort of exemptions
(06:07):
from the so called supplementary leverage ratio. So the SLR
kind of restricts how much dealers can have on their
balance sheet in terms of treasuries. If you suspended that,
people might have a little bit more room to kind
of manage a rapid sell off. So there's kind of
conversations about that, but we haven't got to a point
yet where those dislocations are particularly severe. In fact, you're
looking kind of at funding markets. While we are seeing
(06:29):
sort of an increasing cost, it's still relatively contained and
I think Beth Hammock of the Cleveland Feds or described
them as as strained but sort of working.
Speaker 1 (06:39):
Okay, so question marks over that safe haven status rather
than necessarily a serious attack on us.
Speaker 2 (06:45):
Yeah, I mean, I think what we will see. I mean,
we are seeing kind of like rallies in European bonds
this week, and they're providing kind of an alternative to
those who are seeking havens. I think, you know, there's
a lot of bigger questions, you know, just kind of
given this very volatile period we've had since kind of
the tariff announcement, to what degree, you know, investors overseas
continue to view treasuries as ballast or is it a
(07:07):
kind of stable asset that they want to hold as
a haven. Obviously, the US is still deeply embedded in
the financial system. This is still a very kind of
dollar dominated financial system, So that's not going to change overnight,
but you know, you do sort of see kind of
subtle shifts happening over years. And I mean a lot
of people have talked about whether China could, for example,
(07:27):
get out of its treasury holdings, and there's no indication
of that happening immediately, but they have been reducing those
gradually over the last decade.
Speaker 1 (07:34):
Because as we see trade engines with China ramping up,
is this actually something that could be was a conscious
decision that might come from Beijing, which would go beyond
just investors looking elsewhere for more stable investments, but perhaps
actually a tool in the trade war.
Speaker 2 (07:49):
Yeah, I mean, it's it's a good question to ask,
and I think you know, a lot of people are wandering,
given we're in pretty unprecedented times, whether unprecedented trade war
tools could be deployed. I mean, the Chinese government tends
to take a more long term picture about these things.
I mean, as I mentioned, they've been kind of winding
down some of their treasuries holdings over the last decade.
You know, they were at one point holding I think
one point three trillion dollars of US debt that's now
(08:11):
down to about seven hundred billion, And in fact, Japan
is now the largest holder overseas of treasuries. So China
doesn't necessarily have to move kind of immediately, and like
particularly with great speed, they have a very long term
view on how to kind of change their policy. But
it's certainly a kind of underlying concern that they could
start dumping treasuries at the moment, though, it seems more
(08:33):
likely that they're going to manage the currency exchange rate
as kind of their tool as a bit of a
release volve for some of the pressures that have been
building up in relation to tariffs.
Speaker 1 (08:43):
Okay, Rachel Evans are managing editor for FX and Rates.
Thank you for more explanations like this from our team
of three thousand journalists and analysts around the world, go
to Bloomberg dot com slash explainers. I'm Stephen Carroll. This
is here's why. I'll be back next week with more.
Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and
this is Here's Why, where we take one new story
and explain it in just a few minutes with our
experts here at Bloomberg. Bond market is very tricky.
Speaker 2 (00:21):
I was watching it, but if you look at it now,
it's beautiful. The bond market right now is beautiful.
Speaker 1 (00:29):
But yeah, I saw last night where people were getting
a little queasy. Donald Trump's trade tariffs have investors on edge.
The wild swings in prices of US government debt and
the volatility and borrowing costs that comes with it have
been the most glaring example of a loss of confidence
in what's long been considered a safe investment. Foreign investors
(00:49):
hold trillions of dollars in treasuries, so what happens if
they decide to put their money elsewhere.
Speaker 2 (00:55):
Japan and China are two of the largest holders of
US treasuries, and if they decide that they don't want
to show up an auction, it's going to be very tricky.
Speaker 1 (01:03):
I think what the treasury market is telling us is
that there is not a lot of balance sheet availability
to absorb all this treasury selling. Twenty twenty five feels
like a US driven situation and willingness on the part
of foreign investors to liquid date dollar assets. Treasuries are
part of that complex. Here's why America's debt is a
trade war victim. Our managing editor for FS and Rates,
(01:25):
Rachel Evans, joins me. Now for more. Rachel, First of all,
how important are foreign buyers for US government borrowing?
Speaker 2 (01:32):
Very important. They comprise about a third of ownership for
the treasury market, so it's a significant piece of the pie.
And there's some analysis out there from Barklay's that that's
interesting that suggests that last year so foreign buyers were
really taking down like a large chunk of the debt
issuance that the US was putting out there. These are
all different types of owners. You've got pension funds, you've
(01:54):
got insurers, and you've also got central banks that are
sticking these into their reserves theoretically as kind of a
pillar of stability for themselves.
Speaker 1 (02:01):
The term buyer strike might sound quite encendry in a
lot of ways, but what would a buyer's strike look
like in the US treasury markets?
Speaker 2 (02:10):
Yeah, I think, simply put, and we haven't really seen
this necessarily, so it's kind of hard to exactly what
it would look like, but simply put, you would see
yields continually rising day after day, and particularly at the
long end. When we look at kind of the division
of the types of treasuries that are owned by foreign buyers,
it tends to skew towards longer dated debts, so thirty
(02:32):
year debts. So if you're starting to see yields really
kind of rocketing up at the long end in thirty
year debt, boring costs really sawing their day after day
after day, that would be an indication that you're starting
to see foreign buyers pulling back, and.
Speaker 1 (02:45):
So far, no sign of that that we've seen in markets.
Speaker 2 (02:49):
We've seen little dribs and drabs, but we haven't kind
of seen the sort of the prolonged action that you
would necessarily sort of view as being kind of a
bier strike. We had a slightly iffy auction earlier in
the week where we saw year debt sort of struggling
to find as much demand as it might sometimes, and
we've seen steeper yield cup so that the back end
of the curve selling off more those yields on thirty
(03:09):
year debt rising more so that does indicate sort of
the potential for demand overall is kind of diminishing a
little bit. And I was also taken by some analysis
that our colleague Cameron Christ did that suggested that since
Trump's inauguration, we've actually seen most selling outside of US hours.
So that tells you that in terms of who is
doing the selling, that it is often coming from overseas.
(03:32):
So there's been these kind of little hints of unease
I think amongst kind of foreign investors, but we've not
seen kind of the action that would suggest sort of
a or bona fide by a strike that's really going
to be there for the longer term.
Speaker 1 (03:45):
So we're determined to sort of pullback that we would
term a strike in this context. I mean, if it
were to happen, theoretically, what would a last of foreign
interest in US debt mean for the US government?
Speaker 2 (03:56):
I mean very simply higher yields, so higher borrowing cost
for the US government. They would need to pay more
to refinance their debt and to borrow new money. That
would also have a ripple through effect to things like
mortgage rates, which track ten year yields and are therefore
would also be going up so you'd be getting kind
of that ripple through effect from the US's borrowing costs
through to sort of the average Americans foreign costs and
(04:18):
their debt load. You'd also potentially see the US government
have to rethink how it sells debt. At the moment,
you know, you have kind of a balance between sort
of short dated bonds and longer dated securities that's kind
of set by Treasury to sort of tap into investor interest. Now,
Scott Bessen has said that he would like to move
away from having so much debt at the short end
(04:38):
of the curve, so many bills. He wants more longer
term debt. However, if your cost of longer term debt
is skyrocketing upwards, that becomes very very difficult, and the
need to really issue more short data debt that you
can pay less on becomes higher. So I think you
just sort of have to see that the government recalibrating
how it sells debt in order to make sure that
it's tapping the investors that do stick around.
Speaker 1 (05:00):
Would the Federal Reserve get involved in this, Whether there
be a moment at which something would get so dramatic
that the Central Bank would have to act.
Speaker 2 (05:06):
So the central Bank has it's obviously economic mandate where
it's thinking about inflation and growth and jobs, so this
doesn't necessarily impinge on that. They're also looking at kind
of market functioning. So I think where the FED might
get involved is where if you see some dislocations and
some breakages and how the market functions.
Speaker 1 (05:24):
Being extremely abnormal essentially exactly.
Speaker 2 (05:26):
I mean, this is sort of what we saw back
in like March twenty twenty, when we saw kind of
a huge liquidation of pretty much every assets but a
dash for cash, and that really kind of sort of
broke some of the plumbing in the markets. We saw
a lot of hedge fund trades and winding very very rapidly,
and the FED did step in then with various kind
of facilities to try and kind of ease some of
(05:47):
the liquidity constraints that were really sort of upsetting the
market at the time. So there has been some sort
of conversation in markets about, you know, whether the FED
could intervene or how they'd intervene. So speculate that maybe
they could step in and do sort of emergency qe,
you know, stepping into buy bonds. Others say, no, that's
not likely, but maybe we could see sort of exemptions
(06:07):
from the so called supplementary leverage ratio. So the SLR
kind of restricts how much dealers can have on their
balance sheet in terms of treasuries. If you suspended that,
people might have a little bit more room to kind
of manage a rapid sell off. So there's kind of
conversations about that, but we haven't got to a point
yet where those dislocations are particularly severe. In fact, you're
looking kind of at funding markets. While we are seeing
(06:29):
sort of an increasing cost, it's still relatively contained and
I think Beth Hammock of the Cleveland Feds or described
them as as strained but sort of working.
Speaker 1 (06:39):
Okay, so question marks over that safe haven status rather
than necessarily a serious attack on us.
Speaker 2 (06:45):
Yeah, I mean, I think what we will see. I mean,
we are seeing kind of like rallies in European bonds
this week, and they're providing kind of an alternative to
those who are seeking havens. I think, you know, there's
a lot of bigger questions, you know, just kind of
given this very volatile period we've had since kind of
the tariff announcement, to what degree, you know, investors overseas
continue to view treasuries as ballast or is it a
(07:07):
kind of stable asset that they want to hold as
a haven. Obviously, the US is still deeply embedded in
the financial system. This is still a very kind of
dollar dominated financial system, So that's not going to change overnight,
but you know, you do sort of see kind of
subtle shifts happening over years. And I mean a lot
of people have talked about whether China could, for example,
(07:27):
get out of its treasury holdings, and there's no indication
of that happening immediately, but they have been reducing those
gradually over the last decade.
Speaker 1 (07:34):
Because as we see trade engines with China ramping up,
is this actually something that could be was a conscious
decision that might come from Beijing, which would go beyond
just investors looking elsewhere for more stable investments, but perhaps
actually a tool in the trade war.
Speaker 2 (07:49):
Yeah, I mean, it's it's a good question to ask,
and I think you know, a lot of people are wandering,
given we're in pretty unprecedented times, whether unprecedented trade war
tools could be deployed. I mean, the Chinese government tends
to take a more long term picture about these things.
I mean, as I mentioned, they've been kind of winding
down some of their treasuries holdings over the last decade.
You know, they were at one point holding I think
one point three trillion dollars of US debt that's now
(08:11):
down to about seven hundred billion, And in fact, Japan
is now the largest holder overseas of treasuries. So China
doesn't necessarily have to move kind of immediately, and like
particularly with great speed, they have a very long term
view on how to kind of change their policy. But
it's certainly a kind of underlying concern that they could
start dumping treasuries at the moment, though, it seems more
(08:33):
likely that they're going to manage the currency exchange rate
as kind of their tool as a bit of a
release volve for some of the pressures that have been
building up in relation to tariffs.
Speaker 1 (08:43):
Okay, Rachel Evans are managing editor for FX and Rates.
Thank you for more explanations like this from our team
of three thousand journalists and analysts around the world, go
to Bloomberg dot com slash explainers. I'm Stephen Carroll. This
is here's why. I'll be back next week with more.
Thanks for listening.
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