So far this week, historic volatility has rolled across the global fixed income market. U.S. President Donald Trump’s moves and statements are shaking things up even more. The impact was immediate, with the yield on U.K. 30-year bonds soaring by as much as 30 bps. It closed 25 basis points higher, its highest level since 1998. That volatility is a reflection of larger trends in financial markets. Investors are racing to respond to the new reality of U.S. trade policy.
In the U.K., the yield on 30-year bonds had a significant about-face on Thursday, plummeting 19 basis points after rising. In Germany, the bond market was just as much in sync with this trend. The 2-year bund yield increased by 11bp, while the 10-year bund yield rose by 5bp. These recent movements underscore a complicated relationship between bond yields and stock market performance. That recent volatility has been strongly connected to market perceptions and sentiment regarding the ongoing state of U.S.-China trade relations.
The phrase “Trump put” is gaining currency in discussions about the market’s recent turn. This phrase alludes to a specific kind of intervention meant to soak up unpredictable market swings caused by Trump’s trade agenda. As a result, this intervention helped fuel one of the most vigorous rallies on Wall Street in recent history. In that context, the joint announcement to reduce tariffs to 10% on nearly all U.S. trade partners for a period of 90 days sent shockwaves through the market. This was significant enough news to raise general optimism amongst investors.
John Higgins, chief markets economist at Capital Economics, celebrated the interest rate-dampening effects of these startling developments.
“Expected [U.S.] interest rates have rebounded a bit today, as the latest news from the White House has reduced the risk of recessions.” – John Higgins
This lack of clarity about what future trade negotiations—if any—holds have kept everyone who trades these products jittery. Analysts have warned that uncertainty over what comes next could trigger increased volatility in the days to come. Sanjay Raja, chief U.K. economist at Deutsche Bank Research, weighed in on the close U.S.-U.K. bond market correlation.
“Similar to what we saw in the U.S. yesterday, long end bonds are rallying today. This is most certainly due to market sentiment shifting on Trump’s reciprocal tariffs. And given the pause, markets are rightly assuming that there is a high bar for them to be reinstated at their initial levels. If anything, there’s a sense of relief that trade deals with the U.S. are firmly on the table.” – Sanjay Raja
The bond markets have entered a highly turbulent environment. Tariffs Trump’s escalating, aggressive tariff strategy has mired the U.S. in tit-for-tat global retaliation with China and, as of this writing, tariffs on over 180 countries. This one-two punch has jolted shockwaves across world financial markets, resulting in a newfound environment of uncertainty.
Speaking to the recent volatility, Trump seemed to empathize with the fear that seems to be hanging over Wall Street.
“People were getting a little queasy.” – Donald Trump
As global bond yields largely reversed course on Thursday, analysts are closely monitoring how these developments will influence future trading patterns. The announcement that the government would impose a temporary pause on tariffs was enough to greatly restore investor faith, sending equity markets to record peaks.