Double standards?                        US v European bond market reactions to policy shifts

While certain European government bond markets have experienced volatility over the past couple of years, the eventful early days of the new US presidential administration have not resulted in a similar response from traders. Why are the markets so relaxed and will this change? In challenging times, it’s important to have a source for pricing that is trusted and transparent.  

• Although US Treasury yields have risen since September, the US has not seen the same market reaction experienced by other governments and their debt markets. 
• The UK, France and Germany are three countries where yields have widened quickly and significantly off the back of policy or budget news. 
• Pricing debt securities and derivatives in times of uncertainty and volatility can be challenging. Working with a partner that delivers transparent and trusted pricing is essential.

The new US presidential administration started with a wide range of initiatives that follow up and carry out election promises. However, the US government bond market has reacted mildly – particularly when compared with the dramatic rises in yields seen in other nations’ government bonds as policy makers engage with budgets and inflation. 

While it’s true that US Treasury yields are up around 90 basis points from a September 2024 low of 3.6%, the climb has been gradual. Trading activity in fixed income corporate bonds increased about 16% when word of the proposed tariffs first started to circulate. Canadian and Mexican fixed income securities initially widened, but all this came back to pre-announcement levels by mid-February. This is a mild reaction from the bond markets, compared with what some other governments have experienced:

• United Kingdom – In 2022 the former government’s mini-budget saw Britain's 10-year bond yields soar to a 14-year high on fears of increased levels of UK government borrowing. Many UK pension plans nearly defaulted on their liability-driven investment (LDI) strategies and interest rate swap hedges. The Bank of England intervened, and then-Prime Minister Liz Truss resigned after less than 50 days in office. 
• United Kingdom – In January 2025, the UK government bond market faced challenges again. Chancellor Rachel Reeves’ budget triggered concerns about a rise in inflation, and UK 10-year debt rose to the highest level since 2008’s Global Financial Crisis. 
• Germany – The country – usually viewed as fiscally safe – has seen its 10-year bond yields rise to a peak of over 55 basis points since the start of December 2024. This partly reflects the fact that it may decide to break its very conservative fiscal rules and reform its “debt brake” so that it can take on more debt and issue more government bonds. There is also significant upcoming electoral uncertainty.
• France – The risk premium France pays for 10-year debt over German bunds rose to its highest level since 2012 at around 90 basis points in late 2024 and was at a higher level than Greece for the first time. The previous French government collapsed after lawmakers opposed the proposed budget’s spending cuts. A budget was finally passed in February 2025. 

These sharp and extreme market moves in government bond markets have so far yet to be repeated in the US government bond markets.

Traditionally, yields move higher on expectations of rising inflation, or that governments will be issuing more debt, in an inverse relationship with prices. The new US presidential administration is pursuing what would normally be considered policies likely to lead to inflation. For example, deportations of illegal immigrants could lead to labour shortages; the imposition of tariffs could drive price rises; and cutting taxes also has the potential to stoke inflation. 

Moreover, the markets expect the US to issue about $2 trillion in government bonds this year – taking redemptions into account – which is about 7% of GDP. This is much more than the Euro-zone governments, where as a group they will issue €500 billion ($514 billion) in government debt, which is about 3% of GDP.

So why aren’t the markets responding to the manoeuvres of the Trump administration? It could be that many of the administration’s actions, which were widely signalled in the presidential campaign, are already priced in. Or that the US’s unique position within the world’s debt and currency markets partly insulates it. 

The approach of the US government bond market to the new administration could, of course, quickly change – which would in turn have an impact on bond markets globally. Or the markets may be pricing in other thoughts – for example, that the administration’s massive cost-cutting drive might shrink the US deficit significantly over a short period of time. No matter what happens, the global government bond markets will be interesting to watch over the coming months. 

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