There are not many certainties in the world of money, but this traditionally has been one of them: When life turns scary, people take refuge in American government bonds.
Investors buy U.S. Treasuries on the assumption that, come what may — financial panic, war, natural disaster — the federal government will endure and stand by its debts, making its bonds the closest thing to a covenant with the heavens.
Yet turmoil in bond markets last week revealed the extent to which President Trump has shaken faith in that basic proposition, challenging the previously unimpeachable solidity of U.S. government debt. His trade war — now focused intently on China — has raised the prospect of a worldwide economic downturn while damaging American credibility as a responsible steward of peace and prosperity.
“The whole world has decided that the U.S. government has no idea what it’s doing,” said Mark Blyth, a political economist at Brown University and co-author of the forthcoming book “Inflation: A Guide for Users and Losers.”
An erosion of faith in the governance of the world’s largest economy appears at least in part responsible for the sharp sell-off in the bond market in recent days. When large numbers of investors sell bonds at once, that forces the government to offer higher interest rates to entice others to buy its debt. And that tends to push up interest rates throughout the economy, increasing payments for mortgages, car loans and credit card balances.
Last week, the yield on the closely watched 10-year Treasury bond soared to roughly 4.5 percent from just below 4 percent — the most pronounced spike in nearly a quarter century. At the same time, the value of the American dollar has been falling, even as tariffs would normally be expected to push it up.