After the Tariff Shock, Threat of a US Bond Market Crisis Looms

Planned tax cuts will blow out the fiscal deficit and debt, further denting confidence in the US Treasury market.

- Vikram Khanna

The Trump administration's tariff war has morphed from its initial phase of shock and awe, featuring the highest tariffs in more than a century, to a series of negotiations with its trade partners which are likely to drag on for months.

But if the risk of outsized tariffs has ebbed or at least been temporarily frozen, another risk to the global economy looms large: bond market stress.

This has been going on for months. Investors have been unnerved by repeated flip-flops on tariffs, fears of higher inflation, an erosion of the rule of law and sporadic threats to the independence of the US Federal Reserve. Several analysts put out reports that screamed "Sell America!"

Many investors did just that. For example, since early April, the euro and several Asian currencies surged, including the Japanese yen, the Taiwan dollar, the Singapore dollar and the Korean won, which suggested that investors and central banks were cashing out of US assets, mainly Treasuries, and bringing the proceeds back home, or diversifying into other markets. The selling pressure has kept 10-year bond yields high.

But the threat to the bond markets has now been heightened by an attempt by the Trump administration to push through an extension of its 2017 tax cuts, which if successful, will cost around US$3.8 trillion (S$4.9 trillion) over the next decade.

NO CREDIBLE FUNDING

The problem, though, is that so far, no credible mechanisms have been found to fund this massive giveaway. As a result, US deficits and debts are primed to blow out.