Global Investors Retreat from Bonds: How the U.S. Credit Downgrade and Trump’s Tax Bill Spark Major Fiscal Concerns

The recent downturn in global bonds has caught the attention of investors everywhere. With Moody’s downgrading the U.S. credit rating and concerns about rising U.S. debt from President Trump’s tax policies, the market is reacting strongly.

Rong Ren Goh, a portfolio manager at Eastspring Investments, explains that these fiscal worries make investors rethink their strategies. Credit downgrades usually signal instability, prompting a reassessment of risk in long-term investments.

Despite resistance from some within his party, the potential of Trump’s tax plan—projected to increase U.S. debt by up to $5 trillion—has started a significant sell-off in global bonds. Vishnu Varathan from Mizuho Securities noted that the market isn’t responding well, indicating that U.S. Treasury securities (USTs) are under pressure.

The yield on 30-year Treasury bonds hit over 5% for the second consecutive day, a level that hasn’t been seen since November 2023. Similarly, the yield on 10-year Treasuries has risen significantly this week, causing shifts in investments as confidence in U.S. assets wanes.

Investors are increasingly turning to other markets. In April, many moved away from U.S. Treasuries toward bonds in Japan and Germany. Now, it’s a broader retreat, with sell-offs occurring across major economies.

The pullback in long-term bonds is driven by unique factors in each market, but one common concern is the worsening fiscal outlook. Goh states that this is causing a change in how investors view the long-term risks associated with these bonds.

In Japan, for instance, the 40-year government bond yield recently reached a record high of 3.689%. The Bank of America notes that Japanese life insurance companies, which used to buy long-term bonds, have shifted their strategies as they meet regulatory requirements. Now, as the Bank of Japan contemplates tightening its monetary policy, the situation looks even more precarious.

George Saravelos from Deutsche Bank adds that the allure of Japanese assets for local investors could push more funds away from U.S. bonds. In Germany, a similar story unfolds. Known as bunds, German bonds have seen rising yields too, driven by structural deficits and shifts in policy priorities, as noted by Philip McNicholas from Robeco.

With global inflation concerns looming, many investors are wary of long-duration bonds. Steve Sosnick from Interactive Brokers emphasizes that while short-duration bonds are influenced by central bank decisions, longer bonds are more susceptible to shifts in economic expectations.

Interestingly, some emerging markets, like India and China, are showing different trends. Their bond yields have actually decreased, mostly due to a focus on domestic markets. McNicholas points out that factors affecting their yield curves are often independent of global trends.

In conclusion, the current global bond market scenario is complex and driven by a mix of local and international dynamics. Investors are adjusting to new realities, while the ripple effects of U.S. fiscal policy continue to impact markets worldwide. This situation invites close observation as it evolves.



Source link

Breaking News: Markets,Bonds,Economic events,Government debt,Donald Trump,United States,Markets,U.S. 10 Year Treasury,business news