The US bond market has been at the center of attention recently due to its sharp increase in interest rates and decline in bond prices. This volatility has raised concerns over the impact on the economy, businesses, and households.
When a government borrows money by selling bonds, it must repay the amount plus interest over a specified period. Investors buy these bonds for their perceived safety and stable returns, making them an attractive option during turbulent stock markets. However, recent events suggest that investors are losing confidence in the US economy.
The introduction of tariffs by President Trump led to a sell-off in government bonds, causing interest rates to rise sharply. This means that the US government must pay more to borrow money, which can affect its spending and public finances. The impact is not limited to the government; it also affects businesses, particularly small ones, as higher borrowing costs can reduce their ability to access credit.
Businesses with fixed-rate loans may face increased costs, potentially leading to economic growth slowing down and job losses over time. The housing market could also be affected, especially for first-time buyers who rely on home equity as collateral.
The recent bond market sell-off has led to comparisons with former UK Prime Minister Liz Truss’s mini-Budget in 2022. However, the impact of higher interest rates on US Treasury bonds and the dollar remains a concern.
Despite China being the second-largest holder of US government debt globally, investors are unlikely to be directly affected by the increased interest rates. The fire sale of Chinese assets would actually harm them more than it would benefit the US economy.
Source: https://www.bbc.com/news/articles/cvg838qq7zqo