Money talks and Trump should pay attention to Asia's bond markets
For all of US President Donald Trump's public bellicosity, it is money that talks – more softly but more powerfully, and with greater impact. This is the lesson Trump needs to learn as investors, especially those in Asia, vote with their feet and beat a retreat from US financial markets.
The clearest sign of the severity of that retreat is not the immediate shocks administered to US stock prices by Trump's rantings on tariffs and trade. Rather, it is visible in the longer-term developments in Asia's local currency bond markets. A remarkable and still largely overlooked transformation is taking place as these markets expand to a size that now rivals the dollar-denominated US Treasury bond market and exceeds that of euro-denominated euro-area bonds.
At the same time, faith in US debt securities is rapidly eroding. As Reuters put it in a market briefing on May 21, 'while the US$29 trillion Treasury market is still the linchpin of the global financial system, increasing US policy risk is prompting the rest of the world to rethink its exposure to US assets, including Treasuries'. The decision of ratings agency Moody's to strip the US government of
its AAA credit rating can only accelerate this erosion of confidence.
The implications of this for the financial system in Asia and around the world are significant at a time when everything appears to hang on Trump's every word and deed. For one thing, they suggest there is little danger of Asia
suffering another financial crisis of the kind that gripped the region in 1997, even with the risk of a global economic slowdown or recession stemming from Trump's erratic policies.
They also suggest the assumption that the global economy cannot survive without America's deep and liquid capital markets is misplaced. Long-held faith in the strength and integrity of the US Treasury bond and stock markets had started to erode even before Trump dropped
his 'Liberation Day' bombshell on April 2, imposing punitive 'reciprocal' tariffs on just about every country.
That erosion accelerated rather than slowed when Trump declared
a 90-day pause in his tariff assaults barely a week later. His retreat was seen as bowing to
the markets' reaction as US bonds, stocks and the US dollar all began to slide on the news of the tariffs.
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