Retaliatory moves by China, the European Union and others to President Donald Trump’s widening trade war triggered a sharp sell-off in U.S. Treasury bonds, following last week’s historic market rout. That’s unusual, since investors typically turn to Treasuries as a safe haven during times of economic uncertainty.

Loss of confidence: On Wednesday, China announced an 84 per cent retaliatory levy on U.S. goods after Trump raised the tariff rate on the country to 104 per cent. The EU, meanwhile, announced it will start collecting duties on U.S. goods on April 15 in response to tariffs. The yield—or rate investors get on the secondary market—on the U.S. 10-year Treasury bond was up 0.10 per cent Wednesday to 4.35 per cent, suggesting investors now perceive them as riskier. The yield on 30-year Treasuries, meanwhile, briefly shot past 5 per cent. U.S. stocks mounted a partial recovery Wednesday following Trump’s announcement of a 90-day pause on tariffs to most countries, after days of declines.

Why Treasuries matter: U.S. Treasuries represent government debt. The U.S. raises money by selling them, promising to pay investors back plus interest at a set future date. Normally, U.S. Treasuries due to mature in the near future are considered not just safe, but risk-free. Their status as a safe haven is so entrenched, traders even flocked to buy them during the 2023 U.S. debt ceiling crisis—even though it was caused by the threat of the U.S. government defaulting on its Treasury bill obligations. A surge in Treasury yields could drive up borrowing costs and increase pressure on central banks.

As traders sweat, Trump’s message, posted on social media, was to “BE COOL!” “Everything is going to work out well. The USA will be bigger and better than ever before!”

Canada’s exposure: Canada’s holdings of U.S. Treasury securities have more than tripled since 2021 to about US$351 billion, according to data from analytics platform MacroMicro. That’s because the U.S. deficit ballooned during that time period, as the country mounted a historic fiscal and monetary response to the COVID-19 pandemic, according to Alberta Central chief economist Charles St-Arnaud. Canada’s big banks and pension funds all declined to comment or did not respond when asked about their U.S. Treasury holdings. The stock market drop alongside the Treasuries sell-off represents a double whammy to these institutions’ balance sheets, St-Arnaud said. “You have that double negative hit on your portfolio if you’re invested in both.”

How bad could it get?: Paul Badertscher, a spokesperson for the Bank of Canada, declined to comment on the Treasury sell-off. Asked last month about the importance of the U.S. government bond market to the financial system as a whole, Badertscher told The Logic that Canada and other countries have put reforms in place, such as higher capital and liquidity cushions at banks, following the 2008 financial crisis that should protect the country in times of turbulence. “Canada’s financial system remains resilient,” he said.

The silver lining: In June, months before Trump’s election, the Privy Council Office issued a briefing note obtained by The Logic that warned the deteriorating fiscal situation in the U.S. could make Canadian government debt more expensive as well, since the interest rates of the two countries’ government bonds tend to move in tandem. St-Arnaud said that could change, with Canada’s balance sheet looking increasingly attractive compared to the U.S. for investors seeking safety. “Maybe Canada can start to be seen more positively,” he said.

With files from Catherine McIntyre