Volatility is spiking in the bond market on news that China has retaliated against the U.S. by slapping tariffs of up to 84% on imported American goods.
Bond prices are tumbling and yields spiking as fears of a full-blown trade war between the U.S. and China escalate.
The 10-year Treasury yield jumped 12-basis points to 4.386% and at one point climbed above 4.50%. The yield is at its highest level since February of this year.
The action in the bond market is unusual given that fixed income investments are usually viewed as a safe haven for investors during periods of market volatility.
Some analysts are saying that the bond market is having a “tantrum” as uncertainty caused by the Trump administration’s trade policies grows more pronounced.
The two-year Treasury yield rose two points to 3.76%. One basis point is equivalent to 0.01%. Yields and prices move in opposite directions from each other.
Trump’s latest import tariffs began on April 9, including a total rate of 104% on all Chinese imports. China has retaliated with additional 84% tariffs, leading to greater trade turmoil.
At the same time, the U.S. stock market continues to fall, with the blue-chip Dow Jones Industrial Average down another 800 points in premarket trading on April 9.
The benchmark S&P 500 index has lost 12% of its value in the last four trading sessions and is on the cusp of a bear market defined as a 20% drop from recent highs.
A market selloff and recession fears would normally cause investors to shift capital into bonds for safety, driving yields lower. But that is not happening, confounding many on Wall Street.
Traders and analysts are considering numerous theories to explain the unusual situation, including forced selling by hedge funds and foreign investors dumping U.S. government bonds.
The largest foreign holders of U.S. Treasuries are Japan, China and the United Kingdom, countries the U.S. has targeted with increased tariffs.
If foreign countries such as China now dump their holdings of U.S. Treasuries, it could conceivably crash the market.
The move higher in bond yields is trouble for the Trump administration and U.S. Federal Reserve.
Until now, the White House has trumpeted that the tumultuous tariff rollout was at least lowering bond yields and providing a buffer for consumers and investors.