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Traders on the floor of the New York Stock Exchange on Tuesday. A sell-off in U.S. Treasuries pushed 10-year yields to their highest levels since September.Richard Drew/The Associated Press
Escalating tensions over Greenland and a massive sell-off in Japanese government bonds shattered global market calm on Tuesday, sending stock markets sharply lower, pushing up bond yields and driving investors toward safe havens such as gold.
The S&P 500 Index fell 2 per cent, while the TSX Composite fell 1 per cent. A sell-off in U.S. Treasuries pushed 10-year yields to their highest levels since September, while the 30-year yield touched a four-month high. Bond prices and yields move in opposite directions.
The surge in market volatility came one day ahead of U.S. President Donald Trump’s appearance at the World Economic Forum meeting in Davos, Switzerland, where he is expected to continue pushing for American possession of Greenland, even at the risk of a full-blown trade war with the European Union.
This geopolitical uncertainty mixed with investor concern about the sustainability of Japanese government debt that caused Japanese bond yields to soar on Monday and Tuesday, rippling out through global markets.
Carney stands behind Greenland, criticizes Trump without naming him in blunt Davos speech
“It’s hard to disentangle how much of this was Japan, how much of this was worries over Greenland,” Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said in an interview.
“I would suspect more over Japan. But as the day progressed, and as the Greenland tensions continue to escalate, this could create additional fears that another wave of foreign selling [of U.S. government bonds] could be coming.”
Gold, a traditional safe haven, struck a new record high above US$4,700 an ounce, while the CBOE Volatility Index, or VIX, a closely watched “fear gauge” that measures the implied volatility of the S&P 500, jumped to its highest level in nearly two months.
So far this year, investors have taken several shocks in stride, including the U.S. deposing Venezuelan President Nicolás Maduro by military force and the Trump administration ramping up its attacks on the independence of the Federal Reserve, with threats of a criminal investigation into Chair Jerome Powell.
This sense of calm began to crack in overnight markets when investors started selling Japanese bonds. After calling a snap election for the Asian country next month, Japanese Prime Minister Sanae Takaichi said that it was her “strong desire” to suspend a consumption tax on food for two years, sparking investor concern that she would fund the tax cut by issuing more government debt.
Monday and Tuesday saw one of the largest two-day moves in Japanese government bond yields on record, bringing the 30-year yield up to a record high of 3.85 per cent.
“It’s loosening [the] fiscal spigots,” Darcy Briggs, senior vice-president and portfolio manager for Franklin Templeton Fixed Income, said in an interview.
“And when you do that and you don’t have the world’s reserve currency, and given the amount of debt that they actually have, you’re starting to get questions about the sustainability of government finance.”
Mr. Trump threw fuel on already jittery markets on Tuesday by doubling down on his threats to take control of Greenland.
He said on his Truth Social platform Tuesday that there was “no going back” from his plan to take over the island from fellow NATO member Denmark, and posted what appeared to be an AI-generated image of himself, Vice-President JD Vance and Secretary of State Marco Rubio raising an American flag next to a sign that reads “Greenland, U.S. Territory, Est. 2026.”
The posts, which came at the end of a long holiday weekend that closed U.S. markets on Monday, follow Mr. Trump’s recent threats to impose a 10-per-cent import tax on goods from eight European countries starting Feb. 1. That rate would jump to 25 per cent in June in the absence of a deal on “the Complete and Total purchase of Greenland” by the United States, Mr. Trump said in a post.
Trump says ‘you’ll find out’ when asked about his ambitions to annex Greenland
The European Parliament has responded by pausing the ratification of the trade agreement signed last summer with the Trump administration. Some EU leaders, including French President Emmanuel Macron, have floated the idea of using the EU’s anti-coercion instrument, which some analysts call its “trade bazooka,” to severely restrict U.S. trade with the continent.
From the perspective of bond markets, the key question is whether this combination of geopolitical tension and U.S. uncertainty will push investors to sell their holdings of U.S. Treasuries, or at least slow down their purchases.
“I think the big fear is foreign investors no longer buying Treasuries. And given that about a third of the U.S. Treasury debt is owned by foreign investors, that’s a particularly important source of demand,” said Mr. Goldberg of TD.
Prime Minister Mark Carney gave a speech at the World Economic Forum that blamed U.S. President Donald Trump, without naming him, for what Carney described as a rupture in global relations.
Underscoring new skepticism around U.S. assets, Danish pension fund AkademikerPension, which invests on behalf of teachers, said Tuesday that it would sell its U.S. Treasury holdings. Other Danish pension funds have already been trimming their exposure to U.S. assets. While largely symbolic – AkademikerPension’s holdings amount to around US$100-million against total outstanding U.S. Treasuries worth in excess of US$30-trillion – the divestment points to a shift in market tone.
“Most investors don’t really have the ability to go elsewhere, given the size and depth of the U.S. Treasury market. But even a pause in buying, or if we see just a shortening of folks’ duration profiles, so not buying as far out the curve, that puts upward pressure on yields as well,” Mr. Goldberg said.
Rising geopolitical tensions could affect global bond markets at a more structural level, said Ian Pollick, head of FICC strategy and global markets at Canadian Imperial Bank of Commerce. The more tensions rise between countries, the more likely they are to spend money on their domestic economies, including on the military, rather than spending and investing abroad.
“Countries that rely on global savings to fund external deficits, like the United States, will need to have higher rates to re-attract lost marginal dollars of capital,” Mr. Pollick said in an e-mail.
“If markets believe that there is a higher risk of economic autonomy, away from the United States and more inward, it redirects the global flow-of-funds,” he added. “All of this means that the level of real and nominal interest rates are too low.”
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U.S. President Donald Trump holds a board listing tariff rates during “Liberation Day” at the White House in Washington on April 2, 2025.BRENDAN SMIALOWSKI/AFP/Getty Images
Despite Tuesday’s market slump, analysts see little likelihood that even a broader sell-off will be enough to prompt the U.S. to reconsider its foreign-policy approach. Mr. Trump has shown a high tolerance for market disruptions, although this does have limits.
After Mr. Trump announced double-digit tariffs on dozens of trade partners last April, on what he dubbed “Liberation Day,” investors responded by selling U.S. stocks, currency and Treasuries – an unusual combination that suggested they were questioning the safe-haven status of the U.S. dollar.
The President relented a week later and paused the implementation of tariffs after sharp moves in the U.S. Treasury market. He said markets were getting “yippy.”
John Higgins, chief markets economist at Capital Economics, said the moves Tuesday were unlikely to act as a brake on Mr. Trump’s ambitions. “After all, last April it took far bigger moves in markets before there was a climbdown over tariffs,” he said in a note to clients.
With reports from Reuters
