Bond Market Steadies Briefly, Tariff Tensions Loom

After a rollercoaster week, bond markets settled briefly on Thursday, but growing fears over US trade policy point to higher borrowing costs ahead. A pause in President Trump’s proposed tariffs brought short lived investor relief, but experts expect long-term US Treasury yields to rise again, potentially increasing costs for borrowers across both the US and Australia.

The US bond market reacted sharply after the White House delayed many of its proposed levies against China by 90 days. Investors snapped up long-term government bonds after initially selling off, causing yields on the 10 year Treasury to dip to 4.32% from its earlier 4.52% peak. That yield determines key lending benchmarks like mortgage rates, making it a vital economic indicator.

While the temporary tariff pause cooled market nerves, analysts say it may not last. If the US forces trading partners to narrow their trade surpluses, those countries could end up with fewer US dollars to invest in American government debt. Less demand for bonds would mean higher yields, which in turn could raise financing costs for governments and businesses alike.

This spells trouble even beyond Wall Street. Because Australia’s debt market closely follows the US, rising American yields could also drive up local borrowing rates. On Thursday, Australia’s 10 year bond fell by 13 basis points to 4.31%, mirroring the US drop. But as new US Treasury supply comes online and uncertainty persists, yields could rise again on both sides of the Pacific.

Meanwhile, investors are reassessing how aggressive the Reserve Bank of Australia (RBA) might be when it considers rate cuts in May. Earlier market expectations of a half-point move have softened to a one-in-three chance, as some global financial tension eases and economic data gets re-evaluated.

Still, major banks remain divided. Some expect the RBA to proceed with a large cut due to global financial headwinds, while others believe the central bank will take more cautious action if market anxiety continues to ease. With traders now betting on five quarter-point cuts by year’s end, the economic road ahead looks bumpy no matter the outcome.

Source: Australian Financial Review, Business Insider, Black Rock