Tariffs Trigger Turbulence: Global Bond Markets React

Germany's bond market faces volatility as global trade tensions escalate due to U.S. tariffs. Investors shift from bonds to cash, with German and U.S. yields showcasing the strain. Market speculates on further rate cuts by the European Central Bank amid mixed responses from policymakers on dealing with the economic impact.

Longer-term German bonds saw minimal changes on Wednesday, reflecting the fallout from a sell-off in U.S. Treasuries, hinting at investors shunning even the safest assets amid a tariff-fueled market shake-up. Shorter-term bonds gained as market players increased bets on the European Central Bank reducing interest rates this year.

U.S. President Donald Trump's "reciprocal" tariffs took force Wednesday, including hefty duties on Chinese goods, escalating the global trade conflict. China, stating its opposition to a trade war, nevertheless pledged to oppose U.S. measures if tensions escalate further.

The German 10-year yield, a eurozone benchmark, dipped by 1 basis point to 2.618%, after initially climbing over 6 basis points. Bond yields counter-move with prices, and perceived safe investments like German Bunds and U.S. Treasuries faced recent sell-offs as markets rushed for cash.

The 10-year U.S. Treasury yield rose 11 basis points to 4.3684%, widening the yield spread with German 10-year bonds to around 174 basis points. Philippe Ferreira of Kepler Chevreux noted the stress on U.S. reliability as a trade partner, contributed to the Treasury sell-off.

Hedge funds, key players in U.S. Treasuries' selling, leveraged positions based on small price gaps, face rapid unwinding amidst external shocks, according to Torsten Slok from Apollo Global Management, estimating the trades' worth at about $800 billion.

Markets anticipate accelerated global rate cuts due to slower growth prospects post-tariffs. ECB voices, mixed on Trump's tariffs, echo varied economic implications, with ECB forecasting potential rate reductions in April as inflation concerns complicate policy normalization.

(With inputs from agencies.)