Trump’s tariffs boost interest in German, Japanese bonds

With investors seeking safe havens for investment for the first time in years, US Treasury bonds face serious competition from global funds.

The yields on benchmark 10-year Treasury bonds had fallen by approximately 40 basis points this year. With US President Donald Trump’s barrage of tariffs, which are thought to increase the risk of recession, they briefly fell below 4% on Monday.

According to Bloomberg, similar rates have risen in both Europe and Japan. In Germany, the 10-year bond rose to 2.61%, reflecting expectations that bond issuance will increase as the government increases defense spending.

Meanwhile, the rate on 10-year Japanese bonds has also risen after years around zero, and is currently around 1.25% as investors prepare for tighter monetary policy.

While both are still well below US bond yields, they are at levels that make them appear more attractive than Treasury bonds for European and Japanese investors who are protected from dollar risk when buying US securities.

This may convince investors to shift to their own markets, where the policy outlook is more stable.

“The idea that the administration’s various policies could undermine foreign demand for Treasury bonds is gaining traction,” said Matthew Raskin, head of US interest rates research at Deutsche Bank.

Deutsche Bank also warned of a “confidence crisis” in the dollar, while UBS Group believes the euro would get a “shot in the arm” in its status as a global reserve currency.

On the other hand, some believe this change should be viewed with skepticism. The German government bond, Bund, looked similarly attractive in mid-2023, but an aggressive sell-off in Treasury bonds pushed 10-year US yields to 5%, eroding Europe’s yield advantage.

If tariffs revive inflation, this could push US yields higher again.

But according to Bloomberg, even the discussion of such a shift in flows shows that investors are preparing for Europe to play a bigger role in global markets as competition for capital intensifies.

This could lead to greater fragility in the US Treasury market, which has been under attack from buyers in recent years amid concerns that supply could increase.

One of the early tests will take place on Tuesday, when the US government sells $58 billion of three-year bonds, followed by the sale of 10- and 30-year bonds later this week.

Traditionally, the US budget deficit has been financed in part by a wave of capital flowing into Treasury bonds from around the world.

According to Barclays’ analysis of fund flow data, foreign ownership of US Treasury bonds accounts for about a third of the market, and the foreign sector was the largest source of US bond demand last year.

This reflected net purchases of $910 billion, about half of which were in Treasury bonds.

According to US government data, the vast majority of foreign Treasury assets are in longer maturities. Ales Koutny, international interest rates manager at Vanguard, said this means that as foreign demand decreases, it could steepen the US yield curve, meaning long-term rates will rise relative to short-term rates.

An early indication of how investors are navigating global yield shifts may emerge in a few days. The new fiscal year has just begun in Japan, and this is a period when companies there typically review their allocation strategies.

Japan is a key player in global bond markets due to the Bank of Japan’s decades-long ultra-low interest rate policy, which has pushed investors to seek yield.

Germany initiated the change in early March, announcing plans to allocate hundreds of billions of euros for defense and infrastructure. Bund yields rose as investors priced in bond issuance to cover the spending.

The European Union’s large pool of savings surplus means it is the largest foreign holder of US public debt, while also playing a large role in US corporate finance.

If European countries meaningfully increase their investments, these savings could be kept at home.