There’s turmoil in the U.S. bond market on news that China has slapped 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 4.36% 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 worsens.
Rising Volatility
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 went into effect on April 9, including a total rate of 104% on all Chinese imports. China has retaliated with 84% tariffs, leading to greater trade chaos.
The U.S. stock market continues to fall, with the blue-chip Dow Jones Industrial Average down another 250 points in early trading on April 9. 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 experts on Wall Street.
China Dumping U.S. Bonds?
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 said that the tumultuous tariff rollout was at least lowering bond yields and providing a buffer for consumers and investors.
Is the Vanguard Total Bond Market ETF a Buy?
Most analysts don’t offer ratings or price targets on the Vanguard Total Bond Market (BND) exchange-traded fund (ETF). So instead, we’ll look at the ETFs performance over the past five days. As one can see in the chart below, the ETF has sunk 2.80% in the past week.
