Opinion: Aura Of US Treasury Bonds Is Slipping Away

For my generation, the year 1991 is etched in memory not merely as a deep economic crisis, but as a chapter of deep national humiliation. It was the year when India, desperate and cornered, was compelled to kneel - forced to mortgage its gold and open up its economy on terms dictated by the West. Just to secure a $2.2 billion IMF loan and a $500 million World Bank package, we had to accept conditions that felt like a surrender of sovereignty.

Let me quickly clarify that it wasn't the reforms that hurt, but the way they were forced upon a proud and ancient civilisation, reduced in that moment to a supplicant. As a matter of fact, the dismantling of the corrupt licence raj or the tearing down of irrational tariff barriers was long overdue. We were happy to get rid of them. But what stung was the way we were made to do it: not as a partner in progress, but as a failed pupil being punished. The terms were harsh, the tone condescending.

I remember how the West behaved, particularly the United States, which was self-righteous at its best those days. They had the swagger of a free world and the free market. They demanded the same from us. They saw the world in their own image.

Today, the irony is too bitter to ignore. The same US, once the self-declared champion of globalisation, is now hiding behind tariff walls of its own making. President Donald Trump has, annoyingly for everyone, put a universal 10 percent tariff and is engaged in bullying friends and foes alike. And no one, it seems, dares to confront him.

Treasury bonds' aura fading

Trump's erratic threats, his disregard for international norms and his open dadagiri have triggered chaos in global markets. US consumers, once shielded by the confidence of economic stability, now flounder in a sea of uncertainty.

The most striking sign of the current turmoil is that even US Treasury bonds - once seen as the safest investment in the world - are starting to shake. For decades, investors turned to these bonds during crises, trusting they were a safe place to park their money.

But that trust is now fading. Over the past 10 days or so, a dramatic sell-off has swept through global markets. Investors who once found comfort in US debt are now asking what was once unthinkable - is America still the anchor of the global economy?

This fresh wave of panic was sparked by Trump's move last week - a new round of sweeping tariffs on dozens of countries, including a massive 145% duty on Chinese imports. The interest rate (or "yield") on the 10-year US bond jumped to 4.516 percent before falling back slightly - a big and sudden change not seen since Trump was first elected in 2016. The 30-year bond also saw a sharp rise, nearly hitting 5%. It's hard to say if one should laugh at Trump's tactics or cry, because at a time when America is flexing its protectionist muscle, its most sacred financial instruments are losing their shield of invincibility.

"This is a fire sale of Treasuries," said Calvin Yeoh, a hedge fund portfolio manager, who was quoted in the media, his words echoing the fear that this is no routine correction but a structural unravelling. "I haven't seen moves or volatility of this size since the chaos of the pandemic in 2020."

Trump had to blink, thanks to bond market jitters

The bond market sell-off was so jarring it rattled nerves even inside the White House. "People were getting a little queasy," Trump admitted last Wednesday, telling reporters he had been closely watching the market. "The bond market is very tricky," he added. While criticism from Wall Street and economists had failed to sway the mercurial President, the deepening turmoil in the bond market was enough to make him pause-prompting a delay on several of his planned tariffs.

Even with Trump's 90-day pause on higher tariffs, the financial markets are still very nervous. Last Wednesday, the interest rate on US government debt jumped to 5% - a big move that usually only happens in a crisis. The last time something like this happened was during the Covid pandemic in March 2020, when the world was more worried about finding ventilators and vaccines than watching bond markets. Back then, it took emergency action to calm things down. This time, Trump's sudden pause on tariffs acted like a quick fix to stop the panic - at least for now, for 90 days.

Traditionally, when the world gets jittery, for example during a looming recession, investors rush into US Treasuries, driving prices up and yields (interest rate) down. But not this time. Despite growing fears of a US recession, investors are spooked, bond prices are falling and yields are rising, a symptom of growing fear about where this trade war might be heading. It is the financial equivalent of seeking shelter from a storm or heavy rains and finding the roof leaking. Helplessness is today's global order.

Who's to blame for this market mayhem? Well, who else but President Trump. His raised tariffs and his decision to slap 145 percent tariffs on Chinese goods has reignited the "Sell America" narrative. The media quoted a blunt financial expert as saying: "Treasuries and US equities are under pressure. That's a toxic combination for the dollar." In short: the markets are not impressed.

Now for a slightly technical twist - but one that's really important. Hedge funds have been placing big, risky bets known as "basis trades." These bets count on tiny price differences between US government bonds and the futures tied to them. When markets are calm, that can work. But when things get jumpy, like now, those trades can fall apart fast. To make matters worse, brokers are now asking these funds to pay up or put down more money, and the easiest thing to sell in a hurry are US government bonds. Yes, the very same bonds everyone sees as safe and stable. One expert put it simply: "US bonds are usually rock-solid, but when big investors need cash quickly, even those get dumped".

What are government bonds?

The other day I was chatting with a London-based fellow journalist and a few random neighbours and they seem to have very little idea about government bonds and how they work. So, before going any further let me explain it as well as I can: Government bonds are the instruments they use to borrow money. When a government issues bonds (like US Treasury bonds, UK gilts, or Chinese government bonds), it's borrowing money from investors - promising to pay it back later with interest. Let's take the US as an example. When the US wants to borrow money, it issues Treasury bonds. Investors, such as governments, banks, pension funds and even individuals, buy them, giving the government cash up front. The US government pays back the face value at a future date. It also pays interest regularly. So, in reality the US government's total bonds are its total debt.

Why it matters to India in a big way

This story is of massive interest to India and Indians. For Indian investors, especially the government, US bonds remain a trusted tool for stability and risk management in an unpredictable global economy. India is a significant holder of US Treasury securities, ranked 14th, with total investments-government and private-reaching around $225.7 billion as of January 2025 (It was $247.2 in September 2024). While precise figures splitting public and private holdings aren't publicly available, these investments are primarily driven by a mix of portfolio diversification strategies, foreign exchange reserve management and responses to global and domestic economic conditions.

Another potential twist

Now let me come to another twist in the tale. As of January 2025, China held roughly $760.8 billion in US Treasury securities, making it the second-largest foreign holder after Japan. If China were to suddenly sell a significant portion of its US Treasury holdings, a few things could happen. It could lead to increased US interest rates. A large sell-off would flood the market with Treasuries, decreasing their prices and increasing yields, which translates to higher borrowing costs for the US government and consumers. Such a Chinese move could unsettle global financial markets, leading to increased volatility and uncertainty. It could also strain US-China relations. It could escalate economic tensions between the two nations, potentially fuelling the ongoing trade war further.

However, this action would also pose significant risks to China. Here are some scenarios. Financial losses -- a rapid sell-off could devalue China's remaining holdings, leading to substantial financial losses; currency appreciation - selling US assets could strengthen the yuan, making Chinese exports more expensive and less competitive globally; and finally, it would lead to global economic instability. As a major player in the global economy, actions that destabilise markets could also negatively impact China's own economic interests.

So, while China has the capacity to influence US financial markets through its Treasury holdings, a sudden sell-off would entail significant risks for both nations and could lead to broader global economic repercussions.

US government neck-deep in debt

As of March 2025, the total US Federal government debt stood at $36.56 trillion; China's debt by the end of 2024 was approximately $6.7 trillion; the UK's borrowings stood at $2.5 trillion. These bonds are tradable - so their prices move up and down based on demand, interest rates, inflation expectations and global confidence. If investors sell off bonds, like they are doing with US Treasuries now, prices fall and yields (interest rates) rise, which makes borrowing more expensive for the US government and it can derail its budget plans.

Anyway, this isn't just about market jitters or investor nerves. This is about the erosion of trust in the very instruments that have long underpinned the global economy. US Treasury bonds have, for decades, been seen as the ultimate safe haven-a place to park money when the world feels unstable. But what happens when the instability emanates from the safe haven itself?

The consequences could be seismic. If confidence in US debt continues to erode, borrowing costs will continue to rise. That, in turn, affects everything from mortgage rates to infrastructure funding to social spending. Already, whispers are growing louder on Wall Street that the Federal Reserve may need to step in with an emergency interest rate cut-a drastic measure that reflects just how serious the situation is becoming.

And yet, the architects of this chaos remain defiant. President Trump continues to tout tariffs as a cure-all, bullying trading partners and flouting international norms.

In 1991, India was told to shape up or ship out. It did so, with courage, resilience and long-term vision. Today, it is America that is showing signs of fragility-not in its fundamentals, but in its political leadership and economic direction. The rest of the world is watching and saying this turmoil will be bad for everyone. But when you are on top you often stop listening.

(Syed Zubair Ahmed is a London-based senior Indian journalist with three decades of experience with the Western media)

Disclaimer: These are the personal opinions of the author