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U.S. government bond markets are feeling the squeeze from all sides. Yields on 10-year government debt have dropped in recent weeks amid signs of slowing growth and investors’ reflexive flight to safety following President Donald Trump’s tariff talk. But buyers should beware a false sense of security: blown-up deficits, a major trade war, and something going haywire in tech tycoon Elon Musk’s forceful takeover of U.S. government payment systems all introduce major and sometimes opposing risks, making the future direction of yields hard to predict. The only guarantee is volatility.In the month after Trump’s election victory in early November, yields on 10-year Treasuries broadly fell, reflecting the prevailing view among money managers that the president’s economic team, especially Treasury Secretary Scott Bessent, would prioritize spending cuts to finance lower tax rates, while minimizing inflationary tariffs. Trump’s promise of levies on Canada, Mexico, and China cast doubt on that benign view, with yields climbing to 4.8% by mid-January. Since then, more false starts to the trade war, as well as cooler wage and employment data, have combined to lower Uncle Sam’s borrowing costs, giving the administration space to work out its next move.The range of possible economic policies, and their novelty, is keeping investors in the dark. Setting up new trade barriers which scramble supply chains for industries from automobiles to agriculture is likely to hurt growth while raising prices. Trump’s decision to delay 25% blanket tariffs on U.S. imports from Canada and Mexico by a month in exchange for increased border security was welcome. Less clear is whether that truce will last.Meanwhile, Republicans in Congress are considering ways to finance up to $8 trillion in tax cuts, which could boost economic activity but also add to long-term U.S. borrowing needs when the Federal Reserve’s policy rate is already above 4%. Investors expected more clarity by now, but Trump and his counterparts in the legislature still lack a definitive path forward on spending cuts and the duration of the tax plan.The risk of nasty surprises has also increased. Congress must raise its statutory borrowing limit by sometime in the summer to prevent a U.S. default, a harrowing exercise that poses extra danger when debt-averse Republicans control Washington. On top of it all, Tesla CEO Elon Musk’s apparently forceful takeover of various crucial pieces of U.S. government machinery, including the mechanism for making debt payments, introduces unfathomable hazards that are near-impossible to capture in the price of financial securities. After all, Musk cited interest payments as an expense worth cutting when he cursorily reviewed U.S. government spending in the months before Trump took power.U.S. debt is supposed to be the safest asset in the world, backed by the full faith and credit of the stars and stripes. That reassurance has historically made Treasury bonds a haven for investors. The refuge looks increasingly flimsy.More By This Author:Have European ETF Investors Chased Performance Over The Course Of 2024?
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