Trump's pressure on the Federal Reserve triggers a flight to safety, with two-year German bonds becoming a "safe haven" for funds
Former U.S. President Trump pressured the Federal Reserve, causing investors to turn to German short-term bonds as a safe haven, driving their prices up. The yield on two-year German bonds fell to 1.62%, the lowest since 2022. Investors sold off U.S. Treasury bonds and fully bought European bonds, with expectations that this trend will continue. The market is focused on the upcoming German bond auction, which is expected to push yields higher. While the Federal Reserve faces inflationary pressures, the European Central Bank has clarified its path for further interest rate cuts
The Zhitong Finance APP noted that due to President Trump's tough stance on the Federal Reserve, investors are flocking to Europe as a safe haven, leading to a significant rise in the prices of German short-term bonds.
The yield on two-year German bonds fell by as much as 6 basis points to 1.62%, the lowest level since 2022, while the yield on ten-year German bonds also declined. Meanwhile, after selling U.S. Treasury bonds on Monday, investors broadly bought European bonds.
In recent weeks, following severe fluctuations in global markets, Eurozone bonds have become a safe haven for investors. U.S. Treasuries, typically regarded as the world's primary safe haven, have plummeted due to Trump's efforts to reform global trade and pressure on Federal Reserve Chairman Jerome Powell to cut interest rates, shaking market confidence in U.S. assets.
Chris Zakarelli, Chief Investment Officer of Aurora Investment Management, stated: "We are seeing European investors repatriating some of their investments in the U.S.—specifically in the tech giants and U.S. Treasuries. We expect this trend to continue as long as tariff policies and other anti-globalization measures are seriously discussed."
On Tuesday, U.S. Treasury futures prices fell, while long-term Treasury futures prices remained almost unchanged after a significant sell-off on Monday.
Investor attention will next turn to the German two-year Treasury auction scheduled for later on Tuesday—an event that typically drives up yields, highlighting strong demand for German bonds.
The front end of the German yield curve is particularly attractive as it is expected to benefit from further interest rate cuts by the European Central Bank. Despite stubborn inflation hindering the Federal Reserve's easing policies, the European Central Bank has clarified its path for further rate cuts following last week's seventh rate cut.
On Tuesday, the money market increased its bets on the extent of the European Central Bank's rate cuts, expecting a reduction of slightly more than 70 basis points by the end of the year, up 5 basis points from last Friday's closing price. Policymakers, including Martins Kazaks, warned that U.S. tariffs are exacerbating uncertainty and increasing the risk of recession in the Eurozone