The Crisis in the U.S. Government Bond Market and Its Implications for the Global Financial System

The tariff-based trade war initiated by Trump has had a direct impact on financial market volatility. The combination of U.S. tariffs, retaliatory tariffs imposed by some trading partners, and the 90-day suspension ordered by the U.S. president regarding the effective implementation of “reciprocal” tariffs has led to fluctuations in the stock market. Although such instability has occurred under relatively moderate conditions so far, some recent events indicate that selling pressure—a phenomenon in which many investors begin selling assets simultaneously due to the threat of economic instability—may have spread to other markets, particularly the U.S. Treasury market and the short-term dollar funding market.

To understand the impacts of the current turbulence on financial stability, it is necessary to understand how market pressures have affected the functioning of the global financial system. If left unchecked, these tensions could lead to a freeze in financial markets, increasing the risk of a severe financial crisis.

Against this backdrop, the status of U.S. Treasury bonds as “safe haven” assets is in question. Generally, during times of financial market crisis, investors tend to shift capital into assets considered safe havens—they are seen as more reliable for preserving value when other assets, such as stocks, are falling. Until now, the safest assets to invest in were the U.S. dollar and U.S. Treasury bonds. However, Trump’s actions regarding the imposition of tariffs are changing this pattern.

On April 2, 2026, when the U.S. president announced reciprocal tariffs higher than market expectations, he triggered a sharp drop in the stock market. Faced with uncertainty, many investors sought safety in U.S. Treasury bonds, causing yields on 10-year Treasuries to fall from 4.17% to 3.96% by April 4. However, in the days that followed, the trend reversed: investors began selling these bonds, and yields rose rapidly, reaching 4.34% on April 9, when the stock market recovered following Trump’s announcement of a 90-day extension. This scenario runs counter to expectations. Typically, yields on U.S. Treasury bonds fall during market turbulence, as investors seek these bonds as safe-haven assets.

Similarly, the U.S. dollar index—which measures the currency’s value against the major G10 economies—fell from 104.2 on April 2 to 103.2 on April 9. This movement drew attention because, during periods of financial turmoil, the dollar typically strengthens, as international investors often seek it out as a safe-haven asset. The weak performance of both the dollar and U.S. Treasury bonds has raised doubts about these assets’ ability to continue being viewed as the primary safe havens of the global financial system. These concerns are even more significant given the decline in foreign investors’ share of U.S. Treasury bond purchases, which fell from over 50% in 2008 to about 30% today.

Data released by the U.S. Treasury Department showed that foreign holdings of U.S. Treasuries fell by 1.47%, from $9.487 trillion in February to $9.348 trillion in March, a decline driven primarily by reductions in holdings by Japan and China. Japan, the largest foreign holder of Treasuries, reduced its holdings from $1.239 trillion to $1.192 trillion. China, meanwhile, reduced its holdings by about 6%, from $693.3 billion to $652.3 billion, the lowest level since 2008. Although China remains the third-largest foreign holder of U.S. debt, its reserves have already fallen by more than 14% since the beginning of 2025. These moves have heightened market concerns about a potential decline in international demand for U.S. Treasuries, particularly at a time of increased pressure on U.S. debt and growing volatility in global financial markets.

In relation to China, after reaching a peak of $1.3 trillion in U.S. Treasury securities in 2013, China has systematically reduced this position over the course of more than a decade, and the reasons behind this move are simultaneously geopolitical, strategic, and financial in nature. One of Beijing’s central objectives is to minimize its financial vulnerabilities vis-à-vis Washington, a move that has intensified in the face of escalating geopolitical tensions driven by the Trump administration. The precedent set by the European Union’s freezing of approximately 300 billion euros in Russian reserves following the invasion of Ukraine in 2022 served as a strategic warning to China: the possibility that the United States might adopt a similar measure in the event of a conflict has become part of the risk calculation in the management of Chinese reserves. At the same time, China’s response was not dramatic, but rather strategic: reducing purchases, diversifying reserves, and gradually adjusting allocations—a move that fits into a broader context of seeking alternatives to the dollar, whether through gold, bilateral agreements in local currencies, or the strengthening of the yuan in international transactions. In this regard, Beijing has accumulated gold for 17 consecutive months, reaching a record $343 billion in gold reserves, signaling that the reduction in U.S. securities is not merely a defensive divestment but part of a broader repositioning of its international reserves.

In the case of Japan, it is understood that the Japanese government and the country’s financial institutions used part of their dollar reserves to help stabilize the yen in the face of the U.S. currency’s appreciation. Selling part of these bonds can be seen as an exchange rate policy aimed at strengthening the yen at the expense of the dollar. Since Japan is the largest foreign holder of U.S. Treasury securities, any reduction in its purchases causes concern in global markets.

The gradual withdrawal of foreign investors from the U.S. government bond market imposes concrete constraints on Washington’s ability to maintain its historical pattern of deficit spending. By the end of fiscal year 2025, U.S. federal public debt reached $30.3 trillion—equivalent to 100% of GDP—and the budget deficit for that same year totaled $1.8 trillion. Interest payments on this debt reached $970 billion in 2025, representing the federal government’s second-largest expenditure item, and the CBO projects that this figure will double by 2036, becoming the fastest-growing component of the entire budget. In this context, lower foreign demand for Treasuries makes deficit financing more costly: the financial system becomes unstable under the weight of massive deficits, persistent inflation, and a debt burden that was already unsustainable even before the recent turmoil.

The weakening of the U.S. bond market is intertwined with the de-dollarization process being pursued by the BRICS countries. According to the IMF, the dollar’s share of global foreign exchange reserves fell from about 72% in 2001 to 57.8% in the fourth quarter of 2024, with a further decline recorded in the second quarter of 2025. At the institutional level, the “BRICS Unit” was launched in 2026—a currency unit backed 40% by gold and 60% by the bloc’s currencies—establishing cross-border trade mechanisms not mediated by the dollar. Thus, the pressure on the Treasury market acts as a double catalyst: by highlighting U.S. fiscal fragility, it provides concrete arguments to advocates of de-dollarization, reinforcing the perception that an increasing number of countries are seeking to reduce their dependence on the dollar, in part because the United States has used the currency as an instrument of political power.

This trend heightens concerns regarding the dollar’s strength as the primary international reserve currency and may limit the United States’ ability to sustain high public deficits over long periods. This is because the dollar’s privileged position depends, to a large extent, on global confidence in the U.S. economy and the safety of U.S. Treasury securities. If foreign investors continue to reduce their holdings of U.S. assets, the U.S. may face greater difficulties in financing its debt at low costs, which puts upward pressure on interest rates, increases financial instability, and reduces the U.S. government’s ability to sustain high levels of public spending.