Trump’s Tariffs Ignite Debate on the “Safe Haven” Function of U.S. Treasuries
Trump’s imposition of reciprocal tariffs has triggered discussions about the potential collapse of the “safe haven” function of U.S. Treasuries, sparking a heated debate among Wall Street experts. This article attempts to summarize the key points of the discussion and analyze the potential sell-off by the two largest foreign holders of U.S. debt, Japan and China, to clarify the market’s reality.
Background: Who is Behind Trump’s Tariffs? Economic Advisor Peter Navarro
U.S. Treasuries have long been regarded as a benchmark by global investors, serving as a reliable safe haven during turbulent times such as the 2008 financial crisis and the 9/11 attacks. Traditionally viewed as a “risk-free” asset, their safe haven function is now facing unprecedented scrutiny in the wake of President Donald Trump’s sweeping imposition of reciprocal tariffs.
Typically, when risk assets like equities are sold off, capital flows into Treasuries for protection, driving up bond prices and lowering yields. However, in recent days, following Trump’s announcement of hefty tariffs, yields on long-term U.S. Treasuries (such as the 10-year and 30-year bonds) have not only failed to decline but have instead surged alongside risk assets like stocks and cryptocurrencies (indicating a drop in bond prices). Former U.S. Treasury Secretary Lawrence Summers has criticized that the trading dynamics of U.S. Treasuries resemble those of an emerging market country’s bonds, suggesting a significant increase in their risk premium.
Capital Flight from the U.S.
Data reveals the market’s extreme volatility. On Thursday, April 10, U.S. stocks plummeted nearly half of their historic gains from the previous day, while the yield on the 30-year U.S. Treasury, seen as a global asset pricing anchor, surged an astounding 13 basis points to reach a high of 4.87%. The U.S. dollar has also suffered severe blows, with declines against the euro and Swiss franc marking a decade low. This widespread sell-off across equity, bond, and currency markets continued into Friday, April 11. The situation of simultaneous declines in stocks, bonds, and currencies has exacerbated concerns that foreign investors may be withdrawing from U.S. assets on a large scale, closely tied to the erosion of Treasuries’ safe haven function.
Who is Undermining the Dollar’s Dominance?
So what is causing this issue? Public opinion and Wall Street analysts suggest that the reasons behind the dysfunction of U.S. Treasuries as a safe haven are complex, but the “wolf is coming” effect of Trump’s reciprocal tariffs cannot be overlooked. The imposition of punitive tariffs as high as 145% on all products from China represents the most aggressive protectionist trade barrier the U.S. has seen in over a century, starkly contrasting with its historical advocacy for free trade and open economies. This has led to a crisis of confidence among the public regarding U.S. assets, prompting capital to flee the U.S. Treasury market and pushing long-term yields to their largest single-day increase since the onset of the COVID-19 pandemic in 2020.
The enormous debt burden of the U.S. may also be a deeper reason undermining investor confidence. Years of fiscal deficits and massive borrowing have pushed the total amount of U.S. Treasuries to historic highs, leading to heightened market concerns about the government’s ability to service its debt and the long-term value of the dollar, especially amidst fears of economic recession.
Jim Grant, founder of Grant’s Interest Rate Observer, has pointed out that the foundation of the U.S.’s robust national stature rests on “the world’s confidence in America’s fiscal and monetary management and the stability of its political-financial institutions,” and he candidly stated that “the world may be reconsidering.”
For a country reliant on imports and global capital to finance its massive deficits, this is undoubtedly a dangerous signal.
Wall Street Debate: Who is Selling U.S. Treasuries?
Recent discussions in Wall Street have revolved around whether the situation with U.S. Treasuries is related to its biggest competitor—China. Many analysts in the community boldly speculate that Beijing may be selling its holdings of U.S. Treasuries as retaliation against the extreme tariff policies of the U.S. Ataru Okumura, a senior interest rate strategist at Tokyo SMBC Nikko Securities, also mentioned that China might be selling Treasuries in retaliation, possibly to demonstrate its determination to create volatility in global financial markets to enhance its bargaining chips in negotiations with the U.S.
The analysis team at Goldman Sachs Group Inc. has also speculated that selling dollar assets could be one of China’s options for retaliation, while Ed Yardeni, founder of Yardeni Research, noted that bond investors may start to worry that Beijing and other global holders might begin to sell off U.S. Treasuries.
Japan Officially Denies Selling
Many arguments suggest that Japan, the largest holder of U.S. Treasuries, is the main culprit in this selling. However, earlier, Japanese Finance Minister Katsunobu Kato emphasized that Japan manages its U.S. Treasury holdings as a strategic reserve for future currency intervention, serving as a monetary tool for the Bank of Japan’s reserves, rather than as a tool for trade interference or negotiation, directly refuting this accusation.
China is the second-largest foreign holder of U.S. Treasuries, following Japan. According to official data released by the U.S. Treasury in January of this year, China’s direct holdings of U.S. Treasuries have steadily declined to the lowest level since at least 2011, approximately $700 billion. However, these figures do not capture the more complex reality, as it is possible that China’s capital may indirectly hold a large amount of U.S. Treasuries through custody accounts in countries like Belgium and Luxembourg, where the holdings of private funds have gradually increased in recent years, making it difficult to track the true scale of China’s holdings.
Due to the high confidentiality of China’s official trading data and the lag in the release of relevant data, as well as human corrections recognized by the market, there is currently no way to definitively confirm whether China has indeed conducted a large-scale sell-off recently. The People’s Bank of China and the State Administration of Foreign Exchange have not immediately responded to requests for comment on this matter.
Opponents of the China Sell-Off Theory
However, many market participants remain skeptical of the “China sell-off theory.” Prashant Newnaha, a strategist at TD Securities, pointed out that if China were to sell off massively, its holding structure would likely lean towards the short to medium term, which would put more pressure on short-term Treasury yields. Yet, the reality is that the current sell-off is primarily concentrated at the long end of the curve (with the 30-year yield rising 48 basis points this week, far exceeding the 36 basis points for the 5-year yield), which resembles a broad reallocation of assets by investors rather than a targeted action by China.
Jay Barry, an analyst at JPMorgan Chase & Co., also noted that a reduction of $300 billion in foreign official holdings would drive up the 5-year yield by about 33 basis points. Considering China’s official holdings of $700 billion, the scale of sell-off required to create such significant market volatility would need to be extremely large, a possibility that many observers deem unlikely, as it would also undermine the value of China’s own foreign exchange reserves.
Technical De-Leveraging Pressure
In addition to geopolitical and macroeconomic factors, technical operations in the market are also believed to be one of the main reasons for the collapse of U.S. Treasuries. U.S. Treasury Secretary Scott Bessent stated that the market’s volatility is not driven by systemic risks but rather is part of a “discomforting but theoretically reasonable de-leveraging process” taking place in the bond market.
In the past, global hedge funds favored “basis trading,” a form of high-leverage arbitrage that exploits the tiny price discrepancies between cash Treasuries and Treasury futures. The previous “soft landing” of the U.S. did not trigger such leverage, but recent macroeconomic uncertainties and volatility may have inadvertently triggered stop-losses or forced liquidations of these high-leverage positions, thereby amplifying selling pressure.
Christopher Wood, global equity strategist at Jefferies LLC, believes that compared to a Chinese retaliatory sell-off, the unwinding of basis trading is “more reasonable.”
Conclusion: The Market is Stress Testing U.S. Credit
Benson Durham, global asset allocation chief at Piper Sandler, stated that although there are concerns about the management of the U.S. economy, there is currently no clear indication that investors are specifically “punishing” U.S. assets (relative to European assets). Additionally, on Thursday, April 10, the U.S. Treasury successfully auctioned $22 billion in 30-year bonds, receiving enthusiastic subscriptions from investors, which indirectly confirms that there is still demand for U.S. Treasuries.
Regardless of the exact reasons for the current market turmoil, a clear signal has been conveyed to Washington’s policymakers: investors no longer have absolute confidence in U.S. Treasuries, which are the cornerstone of global finance, collateral for trillions of dollars in everyday borrowing, and the standard for all risk rates. If their “risk-free” status undergoes a fundamental shift, the potential destructive power will be immeasurable. Moreover, as China recently demonstrates its “muscle” due to the tariff issues, the market is beginning to see possible “new options” that may escape the dollar system. In the coming weeks, the market will closely monitor the release of more data and the subsequent policy directions of the U.S. government to determine whether this storm is just a temporary ripple or the prelude to a transformation in the global financial landscape.
