WeeklyWatch – The US–China trade war escalates

29^th April 2025

Stock Take

Stock Take usually provides a comprehensive overview and analysis of equity markets, but with the backdrop of escalations between the US and China, this week we’re exploring what impact the ongoing tariff war between the two nations could have on bond markets and investors.

US bond market faces turbulence

Political tensions are mounting and the trade war between China and the US is deepening. As a result, fluctuations in the bond market have investors feeling concerned.

Bonds are debt securities issued by governments and companies to raise money. Bondholders are effectively providing a loan to the government or company issuing a bond, on which they earn interest, known as the yield.

US treasuries (US government bonds) have typically been viewed as a safe investment. However, with all the volatility that’s been playing out over the last few weeks – the threat of huge tariffs on all Chinese goods entering the US and consequential reciprocation on American goods exported to China – investors are now left scratching their heads when it comes to predicting what’s to come next, both in the short and longer term.

Several investors have opted to vote with their feet, reducing their exposure to US dollar assets, treasuries and equities – resulting in sharp falls in these markets and the value of the dollar. Many of these losses have been recovered by equity markets, but there are major concerns that foreign investors are losing confidence in the stability of the US economy, casting a shadow over the bond market.

The International Monetary Fund (IMF), an organisation made up of 190 countries, monitors global economic stability. Last week, they opted to downgrade their forecast for global economic growth in 2025 to 2.8% – down from 3.3% in January. They also reduced their forecast growth in the US in 2025 by 0.9 percentage points to 1.8%.

All the market turmoil has resulted in a fall in US treasury prices and, therefore, yields have risen. As of Friday 25^th April, the yield on the 2-year US treasury was 3.79%, while 10-year US treasuries stood at 4.28%, although the latter was down from a peak of 4.79% in mid-January.

The reputation of US treasuries as a safe haven is due to the low chance of the government defaulting on its debt. Although highly unlikely, it has happened in the past – the last time being in April–May 1979 when the then US government was unable to repay bondholders for a short period. With the US looking increasingly uncertain now, and the possibility of a recession, the higher yields are indicative of higher risks for investors (even if yields are meant to decline in a recession). However, this may appeal to those prepared to take on more risk for potentially higher rewards.

Are China playing a risky game?

After Japan, China is the next largest holder of US treasuries. If the nation decides to retaliate against Trump’s threatened tariffs by no longer buying bonds – or even trying to sell US bonds – it could have economic repercussions for both nations, as well as on a wider global scale.

Having said this, a sell-off from US treasuries by China would also push up their currency value, making Chinese exports more expensive and further heightening already volatile tensions with the US.

In the latter stages of the previous week, there were indications that President Trump could be reconsidering the size of the levies imposed on China. It has been reported that tariffs on Chinese goods could be around 50% to 65%, but there’s been no confirmation of this.

The Head of Economic Research at St. James’s Place, Hetal Mehta, says:

“From the Chinese government’s perspective, you have to ask what would they gain from selling US treasuries? It could be used as a bargaining chip for a better trade deal.

“Economically, this is an inflation shock for the US if we see tariffs pick up materially and that’s bad for growth. It’s the combination of higher inflation and weaker growth that makes it difficult for the central banks to know how to deal with it.”

Fixed Income Strategist at St. James’s Place Greg Venizelos draws attention to a reduction in appeal for US treasuries. He states:

“From recent auctions of treasury debt, it seems that the non-domestic appetite has decreased and the domestic audience including banks had to increase to take up the slack. And, as assets such as equities have come off in the US, the dollar has also weakened, which is rare as usually when there is a global risk-off there is a flight to the dollar.”

He also highlights that if US growth decreases, tax receipts are also likely to decrease and with planned tax cuts by the US administration coming up, the fiscal risks increase for holders of US treasuries.

“You have seen this reflected in the risk premium that investors should expect, to compensate for this added uncertainty.”

Can Europe reap any benefits from the tensions?

As it stands, the IMF has predicted that growth in the eurozone will slow to 0.8% in 2025, down 0.2%. But the current volatility of the US treasury market has resulted in some positive movements for European bonds.

Venizelos continues, saying:

“Bonds still have a role to play, and we have seen over the past few weeks occasions where yields were rising in the US and retreating in Europe, so there is that divergence. The main issue for investors is market size. The European bond markets are still quite small relative to the US.”

The US treasury index benchmark is close to $17 trillion in face value and the German bond market is around a tenth of this. However, the Italian bond market is the fifth biggest in the world because of the large amount of debt relative to the size of its economy.

What’s the economic outlook across Asia?

It’s an IMF fiscal forecast downgrade for Asia too. Predictions for Japan’s economic growth was reduced to 0.6% from January’s 1.1%.

There’s expected to be a 4% growth for China in 2025, but this is still down by around 0.5% from the forecast in January. Much will depend on the size of the tariffs imposed by the US if/when they arrive, and China’s government has brought in stronger fiscal measures in order to weather the impact.

Are investment opportunities still possible?

Despite the volatility, there are still plenty of opportunities for investors. Mehta goes on to say:

“We shouldn’t be afraid of volatility, it can bring opportunities. However, in order to have resilience you need to be well diversified and this is the focus.”

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

Wealth Check 

Securing the lifestyle you want – now and in the future

A successful career often equates to a high standard of living during your working life – but is it possible to sustain this lifestyle when you retire?

Thanks to continuous discoveries and advancements in medicine, healthcare and better living conditions, life expectancy is increasing. Around one in three children born in the UK today are expected to live to 100.¹

While this is something to be celebrated, have you thought about how you will financially support yourself if you live to 100? Savings may need to stretch over 40 years or more after you stop working, particularly if you wish to maintain the lifestyle you’re accustomed to.

Although no one can know what the future entails, it’s still important to plan for a long retirement that includes considerations for possible care and leaving money to your children or grandchildren.

Using working life to save

Making provisions during your working life is essential in funding your later retirement. It may be tempting just to focus on the present and short term, but this is where a financial adviser can really help.

A financial adviser will help you tailor a comprehensive personalised savings plan that considers how much you earn and how much you can afford to save. The sooner you start, the more time you give your money to grow.

Not only that, but your adviser will help assess your risk profile, giving your invested money the best chance of long-term growth. We’ll balance risk depending on your age and retirement goals.

It’s advisable for everyone to put as much money as possible into a pension. Remember, if you’re employed, your employer will pay in too. Even if you set aside just 4% to 5% of earnings, you can significantly build this up over time through compound growth.

One of the biggest benefits of pensions is the tax relief. Another form of tax-efficient growth can be found in ISAs; our financial advisers will discuss the best options for your situation.

An ideal retirement

One of the most common questions asked once you’ve retired is: “How do I make my money last?”

This will be dependent on the type of pension you have. Defined benefit pensions guarantee an income for life, but most people today will have defined contribution pensions, where income depends on investment performance.

The timing of your pension access is crucial, where you can decide to take your 25% tax-free cash as a lump sum or gradually.

Securing a financially beneficial future

Advisers use cash-flow modelling to plan ahead – we consider inflation and help you work out when and how to utilise income or gift money to family tax-efficiently. This is important in covering potential unforeseen costs like care or nursing fees.

There’s no straightforward solution on how to fund a long retirement. Each individual has different needs, savings and family circumstances to consider. Financial advisers can add immense value in these areas, helping you navigate the future and aiming to ensure that you can cover all you need to maintain your lifestyle and living standards.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

Source:

¹Office for National Statistics, ‘Past and projected period and cohort life tables: 2020 based, UK, 1981 to 2070’, January 2022

In The Picture

Last week, the US Dollar Index fell to a three-year low. Rising political tensions between the White House and the Federal Reserve are partially responsible for this. Markets had a quick reaction – gold (a traditional safe haven for investors) briefly surged to another new high.

However, this shift was reversed following Trump’s reassurance to markets that he didn’t plan to remove Fed Chair Jerome Powell, subsequently easing concerns surrounding central bank independence. However, the dollar remains down over 8% from the start of the year as concerns surrounding tariffs continue to heavily impact markets.

Mehta explains:

“Movements in the dollar are often about more than economic data – they reflect how investors feel about stability, leadership and risk. Last week’s fluctuations show how quickly confidence can be shaken or restored by political messaging.

“As the world’s reserve currency, the dollar underpins global trade, investment and borrowing. So when its value shifts, it doesn’t just affect the US, it has knock-on effects across international markets.

“Understanding these dynamics helps investors make sense of what can sometimes feel like erratic market behaviour – and reminds us that markets respond not just to numbers, but to the stories behind them too.”

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 28/04/2025