Confidence in the US economy is plummeting as investors dumped government debt amid growing concerns over the impact of Donald Trump’s tariffs.
The government sell bonds – essentially an IOU – to raise money from financial markets and these are viewed as a safe investment.
The US does not normally need to offer high rates to attract buyers but on Wednesday the interest rate on bonds spiked sharply to touch the highest level since February at 4.5%.
Trump has gone ahead with sweeping tariffs on goods being imported into the US, while Washington’s trade war with Beijing has escalated.
After the US implemented a 104% tariff on products from China at midnight on Wednesday, Beijing hit back with 84% levy on American products.
Stock markets have been falling sharply over the past few days in reaction to Trump pressing ahead with tariffs.
However, the sale of bonds poses a major problem for the world’s biggest economy.
The interest rate for US borrowing over 10 years has spiked sharply in the past couple of days up from 3.9%.
While the interest rate on US government debt rose, the price of the bonds themselves fell as demand weakened due to investors offloading them.
“Rising bond yields mean higher costs for companies to borrow, and of course governments too,” said Laith Khalaf, head of investment analysis at AJ Bell.
“Bonds should do well in times of turmoil as investors flee to safety, but Trump’s trade war is now undermining the US debt market,” he added.
Some analysts suggested that America’s central bank – the US Federal Reserve – might be forced to step in if turbulence continues, in a move reminiscent of the Bank of England’s emergency action in 2022 following Liz Truss’s mini-Budget.
“We see no other option for the Fed but to step in with emergency purchases of US Treasuries to stabilise the bond market,” said George Saravelos, global head of FX research at Deutsche Bank.
“We are entering uncharted territory,” he said, adding that it was “very hard” to predict how markets would react in the coming days as the bond market suggested investors had “lost faith in US assets”.