Global bond markets were gripped by volatility on Wednesday, as the rollout of U.S. President Donald Trump’s reciprocal tariffs left investors scrambling to find safety in new areas — including German debt.
U.S. Treasurys sold off as a new wave of duties came into force and China and the European Union announced fresh retaliatory action, with the yield on the 10-year Treasury last seen trading 9 basis points higher at 4.352%.
Bond yields and prices move in opposite directions, as investors demand a lower price on the bond and a higher return on their loan to lend to governments that they see as riskier holdings.
Across the Atlantic, longer-dated European government borrowing costs also rose. By 3:55 p.m. in London, the Italian 10-year yield was up 2 basis points and the yield on British 10-year government bonds, known as gilts, was up 12 basis points.
The 30-year gilt yield soared up to 30 basis points at one point, marking a fresh 27-year high, and was last up 25 basis points.
Gilt yields are suffering spillover effects from the moves in Treasurys, but the gilt market is also generally sensitive — relative to other high-grade bond markets — to catalysts that trigger yield rises given stretched margin calls from hedge funds, Diana Iovanel, senior markets economist at Capital Economics, told CNBC.
“It’s not too surprising to see more volatility in gilts than in other [developed market] government bonds against the risk-negative and highly uncertain global backdrop. Beyond that, the U.K.’s stretched fiscal picture is arguably testing investors’ tolerance already,” she added.
The steepening of the U.K. yield curve “highlights the twin challenges of heavy pressure on the U.K.’s fiscal framework, alongside likely negative economic fallout from tariffs,” Alex Everett, senior investment manager at Aberdeen, told CNBC — adding that the Bank of England may need to cut interest rates faster than previously expected as a result.
Germany ‘an alternative safe haven play’
Germany bucked a wider trend as its 10-year bund, seen as a benchmark for the euro zone, traded 7 basis points lower.
Shorter-dated bonds in Europe meanwhile rose in value. The yields on 2-year government bonds in France, Italy and Britain were 9, 6, and 4 basis points lower, respectively. The yield on Germany’s 2-year bunds dropped 12 basis points.
“One factor people are speculating about on Treasurys is around the ongoing theme of a move away from the U.S. dollar, of it becoming less trusted,” Ken Egan, senior director for sovereigns at credit rating analysis agency KBRA, told CNBC in a call on Wednesday. “If you follow that through, one way that could manifest is structural holders of debt, reserve managers in China, could move away from Treasurys in response to policy moves from the U.S.”
Egan added that secondary investors also appeared to be taking a step back from U.S. Treasurys, typically seen as a traditional safe haven assets, given the volatile geopolitical climate.
“Various forces are at odds, because you have inflationary concerns and a rapid repricing of Treasurys on those, but on the other side you have weak demand and growth, and more rate cuts being priced in,” he told CNBC.
German bonds were out of sync with the long-dated market on Wednesday because it is being seen as an alternative safe haven play, as investors — still stunned by the scale of Trump’s actions — wait for more clarity, he said.
Egan also noted that European bonds with shorter maturity terms were rising in value as they are more policy-sensitive and traders want to lock in returns now, as more global interest rate cuts are being priced in.
“Traditionally you might have gone into the U.S. during a period of volatility, but this is a U.S. story. Germany is benefiting from a wider flight to quality. The country has already told the market what it’s going to do, there’s clarity about what its path will look like,” Egan added, referencing Berlin’s recent passing of a huge fiscal package across infrastructure, climate and defense.
In a note on Wednesday, Freya Beamish, chief economist at TS Lombard, likened the spike in U.S. government borrowing costs to the U.K.’s 2022 “mini budget” crisis, which rocked the country’s pension funds and led to emergency market intervention by the Bank of England.
“The really worrisome thing about negative supply shocks is that they push up inflation and destroy demand at the same time, destroying the hedging capacity of bonds for equities. They are capital destroyers,” she said.
“The issue here is not who is right or wrong about the long-term effects of tariffs. It is about investor perceptions over the probability of these types of shocks. And once this narrative starts to be priced in, the risk is of financial accelerators kicking in, as happened in the UK with the LDI crisis.”
Alex Brazier, global head of investment and portfolio solutions at BlackRock, told CNBC’s “Squawk Box Europe” on Wednesday that recent months had been a reminder for investors that “we’re in a new world.”
“This is not a situation where a classic broad stock index, broad bond index, set-and-forget portfolio is ideal,” he said. “Looking at the fundamentals of the U.S. bond market here, we’ve got some technicals going on, we’ve got early signs of stress in the swap market, that bears closely watching.”
Meanwhile, Susannah Streeter, head of money and markets at Hargreaves Lansdown, told CNBC via email on Wednesday that some European government bond yields had moved upward despite rising expectations of interest rate cuts in the region.
“This is likely to be because investors are selling out their positions in European bonds to buy U.S. Treasuries given that they are offering higher yields,” she said. “However, U.S. Treasury yields are falling back again, and the situation remains very fluid.”
— CNBC’s Ganesh Rao contributed to this story.