This has in turn triggered a sell-off in global bond markets more widely, prompting UK gilt yields to spike perilously higher alongside US debt securities.
Those higher yields have further endangered Rachel Reeves’ already precarious fiscal balancing act. Her fiscal rules, and with them her pledge to refrain from additional tax or borrowing increases, are being put through the shredder.
For decades now, the global financial and monetary system has been built around the idea of US Treasuries as the ultimate safe haven asset. It is these securities that historically investors the world over have flooded to in troubled times.
But with the bombshell of Trump’s blitz of tariffs, international trust in Trump’s America to honour its obligations has gone up in smoke.
With the prospect of massive federal Government fiscal deficits stretching out into the indefinite future, confidence in US creditworthiness is being shaken to its very foundations.
“The world order is shifting before our very eyes,” says Sir Charlie Bean, the British economist and former deputy governor of the Bank of England.
“The world’s go-to safe asset no longer looks as safe as it was. When the history books are written, today’s events will be seen as a decisive turning point.”
Suggestions by a key Trump economic adviser that the US should in effect default in order to weaken the dollar – so as to make its domestic industries more internationally competitive – have further heightened cascading loss of confidence in dollar assets.
Stephen Miran, the chairman of Trump’s Council of Economic Advisers, has advocated forcing foreign holders of US Treasuries to swap their securities for perpetual bonds, or otherwise be taxed on the income. Both approaches would be regarded by credit rating agencies as a default.
Attacks like these on monetary and economic orthodoxies mirror the way Trump is ripping up the post-war order on trade, and are badly unsettling investors’ faith in an already fragile global financial system.
In a long post on social media, Ray Dalio, a prominent US hedge fund manager – whose pronouncements have assumed Delphic-like significance in financial markets – wrote overnight: “We are seeing a classic breakdown of the major monetary, political, and geopolitical orders. This sort of breakdown occurs only about once in a lifetime, but they have happened many times in history when similar unsustainable conditions were in place.”
As occurred after the disastrous Liz Truss mini-Budget in the UK, which similarly attempted to dispense with economic orthodoxy, there are already widespread signs of distress selling in financial markets as investors seek to meet margin calls and unwind positions which have been badly wrong-footed by Trump’s tariff wars.
Attempts to break the system on trade are threatening to spill over into a fully fledged financial crisis. This is not what President Trump had in mind.
As the contagion spreads, the Federal Reserve and other central banks will be forced to stand ready to cut official interest rates precipitously in an attempt to calm the waters. Such is the mounting size of the dash for cash that they may need to re-activate “quantitative easing” programmes, buying up the government bonds that private investors are dumping.
Yet the dangers of this being seen by markets as “monetary financing” of government borrowing are in current circumstances all too obvious, further accelerating the loss of faith in US Treasuries and government debt more widely.
In his social media post, Mr Dalio said: “The old monetary/economic order in which countries like China manufacture inexpensively, sell to Americans, and acquire American debt assets, and Americans borrow money from countries like China to make those purchases and build up huge debt liabilities will have to change ...
“In an era of deglobalisation, these big trade and capital imbalances, which reflect trade and capital interconnectedness, will have to shrink one way or another. Also, it should be obvious that the US government debt level and the rate at which the government debt is being added to is unsustainable ...
“The monetary order will have to change in big disruptive ways to reduce all these imbalances and excesses, and we are in the early part of the process of it changing. There are huge capital market implications to this that have huge economic implications.”
This is the big-picture backdrop to the current turbulence in markets. There is a seemingly seismic shift away from dollar assets going on, and a scramble for scarce liquidity among global investors who have borrowed heavily to buy into those assets.
What finally did it for Truss was not so much her unfunded tax cuts or even the open-ended commitment she entered into on spiking energy costs, though these provided the context for what happened.
Rather it was that pension funds had entered into so-called “liability-driven investment” strategies on their holdings of UK gilts, prompting forced selling and a self-fulfilling spiral of decline in asset prices and consequent upward lurch in yields.
Something similar may be happening in US Treasuries, with the spike in yields reflecting specific financial distress in certain quarters of the market.
But it is that wider sense of the US having torn up its reputation as a reliable party to do business with that is underpinning the sell-off.
Nor is it just about Trump’s wrecking-ball tariffs. It’s also about the wider attack by his administration on the old liberal order of things, his propensity to ride roughshod over the rule of law, his repudiation of science and the President’s wider disregard for democratic norms.
Above all, it’s about loss of faith in America as an underwriter of the global financial order. Trump has achieved that great feat of rendering the assumed safety of US Treasuries somehow unsafe.
It’s hard to overstate the significance of this transformation, and impossible to know how bad the fall-out might be. It’s quite a moment.
