When safe havens begin to shake
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Is this a full blown financial crisis? Conditions are certainly worse than they were on Friday, and things were pretty bad then. US President Donald Trump has shown no signs of backing down amid turbulence in financial markets, and escalating tensions with China are particularly concerning.
Large stock market declines don't necessarily signal a financial crisis. Volatility is inherent to equity markets, and sharp drops - like those currently unfolding -often reflect shifting investor sentiment around risk. This is part of a functioning market. A financial crisis, by contrast, is marked by indiscriminate asset sell-offs, a lack of buyers even for traditionally safe instruments, a breakdown in credit flows, and, often, concurrent currency devaluations. Things break.
Beyond some panicked selling, the market reaction has so far been orderly, but a selloff of US government bonds overnight is worrying. Treasuries are among the world's primary safe havens - investors selling equities would usually load up on these bonds, sending the price up and yields down.
Those falling yields then ease pressure on businesses and households via lower interest rates on loans, including mortgages.
However, the yield on 30-year Treasuries surged as much as 25 basis points overnight, to a level last seen in November 2023 (see chart courtesy of the FT). The yield has risen more than half a percentage point since the beginning of the week.
Bond backlash
Simultaneous selling of equities and Treasuries is a central banker's nightmare. We saw this during the pandemic and the Federal Reserve stepped in as a buyer - in March 2020 Fed purchases of Treasuries on peak days ran in excess of $100 bn per day, Adam Tooze points out.
We're still well short of that scenario, and whether we get there will depend on the reasons for the sell-off. At one end of the spectrum, hedge funds may be selling Treasuries to cut leverage, and investors may simply be engaging in a broad dash for cash. At the other, the market may be issuing a deeper judgement on US exceptionalism.
“The sell-off may be signalling a regime shift whereby US Treasuries are no longer the global fixed-income safe haven,” Ben Wiltshire, a G10 rates strategist at Citi, told the FT.
Which of those scenarios proves true will be important for US real estate markets. A temporary dislocation might reverse quickly if the White House reaches agreements with allies. But if investors are reassessing the long-term value of Treasuries, we could be witnessing a structural shift toward higher long-term interest rates.
How the Federal Reserve reacts adds more uncertainty. Policymakers have signalled that rate cuts remain likely this year - markets are pricing in at least three. But those expectations are colliding with signs of stickier inflation, driven in part by tariffs and potential supply chain disruptions. The Fed could find itself cutting short-term rates in a market where long-term borrowing costs remain stubbornly high - a divergence that would blunt the impact of monetary easing and prolong pressure on debt-financed sectors, including real estate.
Cracking foundations
The US government bond market isn't the only roller coaster in the news. The UK government has backed a deal to bring Europe’s first Universal theme park to Bedfordshire, its doors expected to open in 2031. The Times reports:
The Times reports that: "the sprawling 476-acre resort will feature blockbuster rides, a 500-room hotel, and a retail and entertainment complex. Universal says the park could welcome up to 8.5 million visitors in its first year and inject nearly £50 billion into the UK economy by 2055."
Projects like this can't come soon enough. The UK construction sector contracted sharply in March, with new orders falling at their fastest pace since last summer, according to the latest PMI survey from S&P Global. Developers cited higher borrowing costs and subdued demand, prompting fresh job cuts across the sector. Housebuilding shrank less sharply than in February when it hit a 57-month low.
Cooling off
UK house prices slipped again in March, falling by 0.5%, according to the latest Halifax House Price Index. That marks a steeper monthly decline than the 0.2% drop recorded in February and brings the average price of a UK home to £296,699. Annual growth remained stable at 2.8%, held up by stronger regional markets including Northern Ireland, where prices rose 6.6% year-on-year.
The decline is a reversal of January’s brief surge in activity, as buyers rushed to beat the stamp duty deadline. With those purchases now completing and new applications slowing, the market appears to be recalibrating.
“As buyers adapt to higher rates of stamp duty, the positive news is that US trade tariffs announced last week have put downwards pressure on borrowing costs as markets price in an economic slowdown," said Knight Frank's Tom Bill. "The Bank of England is now expected to cut rates three times this year rather than twice. The risk is that tariffs ultimately prove to be inflationary and the spillover effects mean upwards pressure on mortgage costs in the UK. For now, the spring market feels steady although the prospect of a tax-raising autumn Budget will throw more uncertainty into the mix later this year.”
In other news...
Stamp duty and second-home tax put brakes on rural housing market (Times).