Roller coaster week for global bonds continues as ‘Trump put’ sparks reversals

U.S. Treasury yields cooled significantly on Thursday, recovering from a sell-off which bucked the conventional trend for bonds to gain ground as investors move out of equities — as they have been since last week — in search of safer assets.

At 2:42 p.m. in London (9:42 a.m. ET), the yield for the 2-year Treasury was down 14 basis points as the 30-year cooled 4 basis points, while the 10-year — which economists say has suffered its strongest period of volatility for two decades — was down nearly 10 basis points.

Trump said he had been “watching” the bond market — known for forcing the hand of political leaders attempting major economic overhauls — in his Wednesday announcement of a tariff pause, calling it “very tricky” and acknowledging “people were getting a little queasy.” With his tariff policy widely considered likely to be inflationary, a sustained rise in yields could lead to a combination of higher prices, higher borrowing costs and much weaker economic growth or even a recession.

Dhaval Joshi, chief counterpoint strategist at BCA Research, told CNBC’s “Street Signs Europe” on Thursday that the bond moves would have worried Trump more than the U.S. stock market sell-off because of its knock-on impact on mortgage rates.

Joshi also noted market speculation that China had been selling its U.S. assets, fueling some of the bond yield moves. While it is still unclear whether this was the case, the perception that it could be has seemingly spooked some U.S. officials, providing China with some leverage, Joshi argued.

The U.K., plagued by investor concerns over its fiscal outlook, was particularly swept up in the turmoil this week. The yield on U.K. 30-year bonds, which on Wednesday spiked as much as 30 basis points and ended around 25 basis points higher to hit its highest closing level since 1998, tumbled 17 basis points.

“The 90 day pause was enough to arrest the gilt sell-off in the long end,” Sanjay Raja, chief U.K. economist at Deutsche Bank Research, told CNBC.

“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.”

John Higgins, chief markets economist at Capital Economics, said one reason for the Thursday bond market reversal was a renewed reassessment of the path of monetary policy.

“Expected [U.S.] interest rates have rebounded a bit today, as the latest news from the White House has reduced the risk of recessions,” Higgins told CNBC.

“Another reason is that some of the prior sell-off in long-dated Treasuries and Gilts may have been due to profit-taking on, or even fire sales of, government bonds by leveraged investors as equities plummeted. “Accordingly, there was scope for their yields to come back down as the equity market rebounded and the need for such action abated.”

While sentiment has shifted, there is still huge uncertainty over whether and on what terms countries will be able to cut deals with the U.S. and how China will respond, he continued.

Meanwhile, given that a lot of recent volatility appears to have been tied to the stock market, moves may remain higher than usual, factoring in the lack of clarity about upcoming moves, Higgins added.

Bond market moves have been somewhat more stable in Asia. Japanese 10- and 2-year yields were 7 and 5 basis points higher respectively on Thursday as investors piled into stocks. The yield on Australia’s 2-year bond, down sharply since the initial tariff announcement last week, ticked 2 basis points higher.

In a note, the Asian fixed income team at Nikko Asset Management said they maintained their position that Asian government bonds were well-positioned for decent performance, “supported by accommodative central banks in an environment of benign inflation and moderating growth.”

“Concerns over potential growth shocks from US tariffs are likely to provide additional support for regional bond markets. Additionally, with relatively high FX reserves, policymakers are well-equipped to defend their currencies if necessary.”