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Concerns Grow Over US Economy as Tariff Disputes Intensify
Confidence in the United States economy is waning, with investors increasingly turning away from government debt as fears mount regarding the ramifications of President Donald Trump’s trade tariffs. Recent market behavior reflects this unease, as the interest rates on US bonds—a type of investment usually considered secure during economic turmoil—experienced a sharp increase.
Effective as of midnight, new tariffs on imported goods from around 60 nations have begun to reshape the trade landscape, further aggravating the already volatile situation between the US and China. The conflict escalated when the US imposed a staggering 104% tariff on Chinese products, prompting Beijing to retaliate with an 84% levy on American goods.
In recent days, stock markets have seen significant declines in response to these tariff actions. This trend poses a serious challenge for the US economy, particularly in the context of bond sales. US government debt, commonly known as Treasuries, is typically regarded as a safe investment. Yet, the yield on these bonds surged to its highest level since February, reaching 4.5%, complicating the federal government’s borrowing capabilities.
Despite returning to levels observed earlier this year, the yields on US bonds over a ten-year term have jumped markedly, rising from 3.9% in the past 48 hours. Analysts have suggested the Federal Reserve may need to intervene in response to this instability, paralleling the Bank of England’s emergency moves following significant political and economic shifts last year.
George Saravelos, Deutsche Bank’s global head of FX research, remarked, “We see no other option for the Fed but to step in with emergency purchases of US Treasuries to stabilize the bond market.” He expressed concern that market reactions in the days ahead are difficult to predict, noting that investor confidence in US assets appears to be diminishing.
‘US Recession a Coin Toss’
According to Simon French, the chief economist at Panmure Liberum, the Fed might consider cutting interest rates to stimulate borrowing among businesses grappling with rising tariffs-related costs. He described the likelihood of a recession in the US as a “coin toss.” A recession is typically marked by a sustained decline in economic activity, increased unemployment, and decreased income.
Recent analyses from JP Morgan have raised the probability of a recession from 40% to 60%, indicating that American economic policy is diverging from growth-oriented strategies. Trump’s tariffs are anticipated to disrupt global supply chains significantly, imposing new financial burdens on US companies that import foreign goods.
Companies may opt to transfer the cost of these tariffs onto consumers, potentially leading to heightened inflation. The rationale behind Trump’s tariff strategy is to safeguard American businesses from international competition and promote domestic manufacturing.
Nevertheless, uncertainty looms regarding the severity of the sell-off in US bonds and the types of investors involved. Speculation exists that foreign entities, including China—which holds approximately $759 billion in US bonds—might be among those divesting. Saravelos cautioned, “There is little room now left for an escalation on the trade front. The next phase risks being an outright financial war involving Chinese ownership of US assets.” He stressed that such a conflict could yield no winners, with the global economy facing dire consequences.
Source
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