April 2025 and the Great Repricing of Risk

Unprecedentedly, whenever tensions and uncertainty arise, quality securities like US government bonds usually take the lead and witness a remarkable surge in demand. 

However, the events of April warrant further investigation, as they may signal a shift in the dominant economic system.

In this analysis we highlight the reasons behind this unfamiliar move, the consequences, and the meaning of these changes to the financial and economic system.

Following the enforcement of trade restrictions by the US in April, equity and bond markets fell significantly, indicating the level of uncertainty produced by such measures. 

The downturn in the equity market is expected, but the enormous rise in ten years, bond YTM was unexpected, with bond prices declining and yields rising by roughly 15%, prompting decision-makers to halt the tariffs.

This intervention was extremely important because, if these trends had continued at that rate, it would have been very likely that the financial markets would have seen the break in the largest debt market conveyed to the financial system stimulating financial distress. 

This is mainly because the prices of bonds are very sensitive to market rates, as they are priced based on market reference rates, and many financial institutions pledge these government securities as collateral for their financings, which can lead to defaults on margin calls, particularly when those defaults coincide with elevated interest rates.

 Another main concern with the higher yield is that it’s making them an attractive option for investors, which undermines the economic activity contributing to the contractionary policy adopted.

 Such a case is very complicated to solve given the inflationary pressures, as monetary policy can’t adopt lower rates. This would imply that the US would have to encounter even higher financing costs to cover its fiscal deficit.

This abnormal trend in the largest debt market was mainly attributed to aggressive selling by foreign holders of T-bonds and a remarkable decline in non-dealers' demand of US government securities, along with the strategic shift toward real safe asset classes like gold by both state representatives such as central banks and retail investors

Such a transition in central banks' and retail investors' perception of T-bonds could be a sign of reassessing the viability of quality securities. 

Another factor increasing the yield is the increased supply of T-bonds due to high fiscal deficit levels triggered by economic weakness, which reduces tax revenue.

 Perhaps this is the first time in modern history that Treasury bonds have failed to rally during a period of uncertainty, raising uncomfortable questions about their future roles.

To understand whether this bond market instability is a temporary dislocation or part of a deeper trend, we must examine how the US is financing its deficits and the effectiveness of trade restrictions on mitigating the debt burden.

Firstly, we will break down the components of the deficit.

The US currently has a significant current account deficit, amounting to approximately $1.13tn in 2024, which accounts for 3.9% of GDP. 

However, the US benefits from a superior financial inflow. This analysis will solely looks at non-debt instruments to figure out how much of the current account deficit may be covered by the financial account and determine whether high debt levels are stemming from trade or fiscal deficit. In 2024, foreign portfolio equity inflows and foreign direct investment (FDI) reached $421.3bn and $388.0bn, respectively, offsetting around 71% of the current account deficit. This indicates that the trade deficit only accounts for 29% of the US debt, with the majority of the debt arising from government spending and the tax system.

As a result, fiscal policy should be given greater attention in order to control debt levels. 

According to this point of view, implementing such an aggressive trade policy to address the debt issue appears to be ineffective because the main underlying causes of the debt have not yet been addressed, raising doubts about the viability of the plan in addition to the potential for a major economic slowdown brought on by economic interdependence. 

However, this may suggest that the trade restriction measures seem more like a negotiation strategy than a structural solution to the debt issue.

To sum up, the world economy is changing in a way that is dynamic and unusual, accelerating the change to a world that is multipolar or possibly bipolar. 

Protectionist measures combined with the deglobalisation trend are encouraging the formation of new economic blocs and strategic alliances. 

These changes are making states and investors reevaluate how resilient the prevailing economic system is, suggesting that the economic system may be at a turning point.

Given the aforementioned point, it is necessary to question if the conventional safe havens are still as secure as they initially appeared.

Mohammed Fahad Hussain Kamal Alemadi is a senior student at Qatar University studying Finance and Economics