At a glance

  • Political tensions between the US and China have caused significant volatility in the US bond market.
  • Any move by China to reduce its US bond holdings could worsen global economic instability.
  • Despite the uncertainty, there are still opportunities for investors with diversified portfolios.

A troubled US bond market

As the political volatility continues and the trade war between China and the US shows little sign of abating, fluctuations in the bond market have been causing some investor concern.

Bonds are debt securities issued by governments and companies to raise money. Bondholders are effectively providing a loan to the government or company issuing a bond, on which they earn interest, known as the yield.

Typically, US treasuries (US government bonds) have been seen as a safe haven for investors. But the increased volatility of recent weeks – threats of sky-high tariffs on all 
Chinese goods entering the US and reciprocal similar tariffs on American goods exported to China – have left many uncertain as to what to expect next and in the longer term.

Many investors appear to have voted with their feet and reduced exposure to US dollar assets, treasuries and equities, leading to sharp falls in these markets and the value of the dollar. While equity markets have recovered much of those losses, fears that foreign investors are losing faith in the stability of the US and its economy are casting a shadow over the bond market.

The International Monetary Fund (IMF), an organisation of 190 countries which monitors global economic stability, last week downgraded its forecast for global economic growth in 2025 to 2.8%, from 3.3% in January. Meanwhile, it reduced its forecast for US growth in 2025 by 0.9 percentage points to 1.8%.

The market turmoil has seen the price of US treasuries fall. Consequently, yields have risen. Last week (as of Friday 25 April) the yield on the 2-year US treasury was 3.79% while 10-year US treasuries stood at 4.28%, although the latter was down from a peak of 4.79% in mid-January.

The reputation of US treasuries as a safe haven is due to the low chance of the government defaulting on its debt. Although highly unlikely, it has happened – the last time being in April-May 1979 when the then US government was unable to repay bondholders for a short period. With the US looking increasingly uncertain now, and the possibility of a recession, these higher yields are indicative of higher risks for investors (even if yields are meant to decline in a recession) but may also appeal to those prepared to take on more risk for potentially higher rewards.

Risks from China

China is the second largest holder of US treasuries after Japan. If it decides to retaliate to America’s threatened tariffs by stopping buying bonds, or even beginning to sell US bonds, it could have economic consequences for both countries. The fallout would have a knock-on effect for the global economy, too.

However, a sell-off from US treasuries by China would also push up the Chinese currency in value and make Chinese exports more expensive, as well as exacerbating already significant tensions with the US.

Late last week, there were signs that President Trump may be rethinking the size of the levies imposed on China. It was reported that tariffs on Chinese goods could instead come in around 50% to 65%.  However, this has not been confirmed either way as yet.

SJP’s Head of Economic Research, Hetal Mehta, says: “From the Chinese government’s perspective, you have to ask what would they gain from selling US treasuries? It could be used as a bargaining chip for a better trade deal.

“Economically, this is an inflation shock for the US if we see tariffs pick up materially and that’s bad for growth. It’s the combination of higher inflation and weaker growth that makes it difficult for the central banks to know how to deal with it.”

Greg Venizelos, SJP’s Fixed Income Strategist, points to a reduction in appetite for US treasuries. “From recent auctions of treasury debt, it seems that the non-domestic appetite has decreased and the domestic audience including banks had to increase to take up the slack. And, as assets such as equities have come off in the US, the dollar has also weakened, which is rare as usually when there is a global risk-off there is a flight to the dollar.”

Venizelos also points out that if US growth goes down, tax receipts are also likely to fall and, combined with planned tax cuts by the US administration, the fiscal risks increase for holders of US treasuries.

“You have seen this reflected in the risk premium that investors should expect, to compensate for this added uncertainty.”

Could Europe reap the bond benefits?

The latest IMF forecasts are that growth in the eurozone will slow to just 0.8% in 2025, down 0.2%. However, the volatility of the US treasury market has seen some positive movements for European bonds.

Venizelos says: “Bonds still have a role to play, and we have seen over the past few weeks occasions where yields were rising in the US and retreating in Europe, so there is that divergence. The main issue for investors is market size. The European bond markets are still quite small relative to the US.”

The US treasury index benchmark is close to $17 trillion in face value while the German bund market is around a tenth of this. However, the Italian bond market is the fifth biggest in the world because of the sheer amount of debt relative to the size of its economy.

Asia – the economic outlook

Asia has not escaped the downgrade in fiscal forecasts from the IMF. The organisation reduced predictions for Japan’s economic growth to 0.6%, compared to its January forecast of 1.1%.

China is still expected to grow by around 4% in 2025, according to the IMF, although this is down by around 0.5% from the January forecast. While much will depend on the size of the tariffs levied by the US if and when they are introduced, China’s government has introduced stronger fiscal measures aimed at offsetting the impact.

Looking ahead

Despite the ongoing volatility, there are still many opportunities out there for investors. As SJP’s Mehta says: “We shouldn’t be afraid of volatility, it can bring opportunities. However, in order to have resilience you need to be well diversified and this is the focus.”

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

SJP Approved 30/04/2025