In a recent episode of UniSuper’s podcast, Colosimo highlighted that while stock markets experienced significant volatility following the announcement of the so-called “Liberation Day” tariffs, it was the unprecedented sell-off in the bond market that likely influenced the administration’s policy reversal.
The instability in the bond market “seemed to spook the Trump administration”, Colosimo noted, suggesting that the bond market’s reaction was a critical factor in the decision to pause the tariffs.
“I actually think it was the instability in the bond market that made him re-evaluate his tariff policy,” he said.
Following the tariff announcement on 2 April, US shares fell more than 12 per cent in four days, and Australian shares dropped 7.5 per cent in three days.
However, the bond market’s response was even more alarming, with the yield on the 10-year US Treasury rising at an unusual speed from under 4 per cent on 4 April to spike to 4.5 per cent intra-day on 8 April.
“Shares were still falling but bond yields suddenly changed direction and increased by 0.5 per cent in a single week,” Colosimo said. “That’s the biggest weekly increase in more than 20 years, and it’s equivalent to about a 4 per cent fall in the price of a 10-year bond. The correlation went positive – shares and bonds were both falling at the same time”.
Looking into the reasoning behind the bond selloff, the fund’s head of fixed interest pointed to early speculation that the Chinese government may have been offloading US Treasuries. However, he noted: “I actually think the big part of the move was more likely the type of trading activity you’d see in hedge funds.”
“When you look at the interaction between bonds and derivative markets, it looked like a lot of holders who had borrowed money to buy the bonds had to quickly close out those positions, and so all at once, everyone’s trying to reduce risk – they’re selling bonds,” he said.
Last month, InvestorDaily reported that the $149 billion super fund is “questioning” its commitment to the US market.
Speaking on the UniSuper podcast at the time, John Pearce, the fund’s chief investment officer, said the fund had reached “peak investment” in US assets, and would reassess its exposures amid ongoing sharemarket volatility.
While Trump has since suspended tariffs for a 90-day negotiation period, Colosimo noted this week that despite the pause, the average US tariff rate remains at its highest level in over a century, with ongoing concerns about inflation and economic growth.
“I think in the immediate aftermath of the tariff announcement, there did become a general consensus that the magnitude of the tariffs would be enough to send the US economy into recession. Since then, we’ve seen a lot of those tariffs walked back … But even if he turned around tomorrow and cancelled all tariffs, it’s still not clear that the damage can be undone,” he said.
“I think the prospect of a recession will probably stay with us until proven otherwise, and so there’s a lot of uncertainty.”
