Confidence in the US economy is plummeting as investors dumped government debt amid growing concerns over the impact of Donald Trump’s tariffs.
The government sell bonds – essentially an IOU – to raise money from financial markets and these are viewed as a safe investment.
The US does not normally need to offer high rates to attract buyers but on Wednesday the interest rate on bonds spiked sharply to touch the highest level since February at 4.5%.
Trump has gone ahead with sweeping tariffs on goods being imported into the US, while Washington’s trade war with Beijing has escalated.
After the US implemented a 104% tariff on products from China at midnight on Wednesday, Beijing hit back with 84% levy on American products.
Stock markets have been falling sharply over the past few days in reaction to Trump pressing ahead with tariffs.
However, the sale of bonds poses a major problem for the world’s biggest economy.
The interest rate for US borrowing over 10 years has spiked sharply in the past couple of days up from 3.9%.
While the interest rate on US government debt rose, the price of the bonds themselves fell as demand weakened due to investors offloading them.
“Rising bond yields mean higher costs for companies to borrow, and of course governments too,” said Laith Khalaf, head of investment analysis at AJ Bell.
“Bonds should do well in times of turmoil as investors flee to safety, but Trump’s trade war is now undermining the US debt market,” he added.
Some analysts suggested that America’s central bank – the US Federal Reserve – might be forced to step in if turbulence continues, in a move reminiscent of the Bank of England’s emergency action in 2022 following Liz Truss’s mini-Budget.
“We see no other option for the Fed but to step in with emergency purchases of US Treasuries to stabilise the bond market,” said George Saravelos, global head of FX research at Deutsche Bank.
“We are entering uncharted territory,” he said, adding that it was “very hard” to predict how markets would react in the coming days as the bond market suggested investors had “lost faith in US assets”.
Simon French, chief economist at Panmure Liberum, told the BBC that the Fed could decide to cut interest rates in a bid to protect US jobs by making it easier for businesses to borrow cash as they face higher costs from tariffs.
He said it was a “coin toss” over whether the US would enter a recession.
This is defined as a prolonged and widespread decline in economic activity typically characterised by a jump in unemployment and fall in incomes.
JP Morgan, the investment banking giant, has raised the likelihood of a US recession from 40% to 60% and warned that American policy was “tilting away from growth”.
On Wednesday, the Bank of England warned that US tariffs “contributed to a material increase in the risk to global growth” and financial stability.
“Uncertainty has intensified,” it said, adding that a decline in global co-operation between countries is a “further risk”.
This, the Bank said, is “particularly relevant” to the UK because of how connected it is to other economies.
Investors are now betting on the Bank to cut interest rates by as many as four times, to bolster the economy against a potential economic downturn.
Trump’s introduction of tariffs, which are charged on goods imported from countries overseas, threatens to upend many global supply chains.
US-based companies that bring the foreign goods into the country will pay the tax to the government.
Firms may choose to pass on some or all of the cost of tariffs to customers, which could push up inflation.
Trump’s plan is aimed at protecting American businesses from foreign competition and also to boost domestic manufacturing.
US Treasury Secretary Scott Bessent claimed that Trump’s goal was to bring “jobs and manufacturing back to the United States, raising wages, increasing revenues and reviving the American Dream”.
He said the Trump administration was looking to “right the wrongs of longstanding global trade imbalances”.
Questions remain over the scale and what type of investors are dumping US bonds.
There is been speculation some foreign countries, such as China which owns some $759bn of US bonds, might be selling them.
Mr Saravelos said: “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.”
But he warned: “There can be no winner to such a war. The loser will be the global economy.”
