Capital Securities News Agency April 13th, by Editor Xiao Xiang - Three years ago, when the "mini-budget" case of former British Prime Minister Liz Truss triggered a disaster in the UK bond market, she was forced to make an embarrassing concession: not only did she dismiss then-Chancellor of the Exchequer Kwasi Kwarteng, but she also quickly revoked the unfunded and controversial tax cut plan in an attempt to calm the market.

However, despite the 180-degree policy reversal, UK borrowing costs still did not return to previous levels. The UK government and taxpayers were forced to bear additional costs jokingly referred to as the "idiot premium" by the industry.

Now, the US seems to be playing out a similar story.

The US was once considered the cornerstone of the global financial system, but under the leadership of the unpredictable President Trump, it has become an increasingly unreliable economic partner. And there is a price for this – as investors saw earlier this week, they massively sold off US Treasury bonds due to concerns that Trump's trade war would trigger a financial crisis.

Although US Treasury yields briefly fell after Trump made concessions on tariffs on Wednesday, Orla Garvey, investment manager at Federated Hermes, pointed out that yields quickly rebounded thereafter.

Data shows that by the end of this Friday, the benchmark 10-year US Treasury yield, known as the "anchor of global asset pricing," had recorded its largest weekly increase in over 20 years (yield inversely related to bond prices), as investors continued to withdraw from US assets.

This benchmark yield surged more than 50 basis points in just five days to 4.49% – the last time such a sharp weekly increase occurred was back in 2001 during the "9/11" terrorist attacks.

There is no doubt that such an increase will likely push up overall borrowing costs, thereby delivering another blow to the US economy.

"This is terrible. We are redefining the global risk-free rate," said Bhanu Baweja, chief strategist at UBS Group. "If volatility is factored into the global risk-free rate, it will disrupt all markets."

The collapse of US Treasuries speaks volumes.

Garvey stated that the surge in US Treasury yields towards the end of this week indicates that the "risk premium for US Treasuries remains high." This refers to investors demanding extra interest to compensate for the risks associated with long-term loans.

This is undoubtedly something that Trump needs to be increasingly wary of. In fact, he himself admitted this week that pausing the global tariff offensive was partly due to "the market starting to panic."

Neil Shearing, chief economist at Capital Economics Group, pointed out that it is almost certain – it was the movements in the bond market, not the stock market, that forced the US government to change its stance. The bond market sets the borrowing costs for the government.

"There are signs that market functions are beginning to deteriorate. This scared them, shocked the US Treasury, and ultimately led to a policy shift," Shearing said.

However, the problem now is that Trump cannot simply announce a partial freeze on tariffs and expect bond market investors – such as pension funds, wealth management companies, and foreign governments – to forget that he once announced a global trade war. They also won't simply ignore the escalating series of reciprocal tariff measures between the US and China.

In addition, concerns have also arisen about the source of funding for US Treasury bonds. Many of America's major overseas "creditors" are key targets of Trump's current reciprocal tariff policies. Although they have huge trade surpluses with the US, they traditionally use their dollar earnings to buy US Treasury bonds, effectively financing the US government. Trump's policies aim to reduce trade deficits. However, if trade deficits decrease, whether the rest of the world will continue to finance America's fiscal deficit is undoubtedly also questionable.

"The US will be seen as an unreliable partner, leading countries to try to reduce their trade ties with the US and increase trade links with each other. Even geopolitically, Europe will view the US as an unreliable ally and place greater emphasis on self-reliance," said Mohit Kumar, an economist at Jefferies.

Trump pays the "idiot premium" for longer, the greater the damage to the US economy.

Kumar currently advises investors to divert funds to Europe and Asia, stating that the US will have to pay higher interest rates to attract global investors. But given the massive $36 trillion debt scale, this will undoubtedly come at a high cost.

Ultimately, the longer the "idiot premium" persists, the deeper the damage to the US economy will be.

Shearing emphasized that US mortgage rates are directly linked to 30-year Treasury bonds, and rising long-term interest rates will directly affect ordinary households, with potential impacts lasting for years.

Bilal Hafeez, CEO of financial strategy company Macro Hive, also noted that the economic system built by the US over the past few decades has been beneficial to it. Suddenly, investors began to question whether there is political risk in US assets.

"This is a generational shift. The credibility of the rule system established by the US since World War II needs long-term accumulation. The US, as the stabilizer of the global financial system, attracted massive capital inflows, but now this advantage is gone. Not only might it trigger an economic recession, but its long-term growth potential will also be damaged – part of the US' high productivity compared to Europe and Japan stems from its central position in the global system, and the current situation is gradually eroding this advantage," Hafeez pointed out.

This impact will also have a global ripple effect – because rising US borrowing costs often lead to increased yields in other countries.

Stephen Thomas, a professor of finance at Bayes Business School, noted that the threat of global financial pressure is now becoming more severe due to the collapse of market trust. Trump continues to spread misinformation, weakening public trust in US government decisions, which then transmits to the bond market.

Thomas pointed out that all of these will lower our trust in economic data and politicians, and the essence of the bond market is built on credit. "Whether you call it the 'idiot premium' like Truss or the 'lie premium,' Trump's tariff actions have substantively triggered the emergence of this risk premium."

(Capital Securities News Agency, Xiao Xiang)

Original article: https://www.toutiao.com/article/7492586124011913782/

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