Global Financial Markets Face Destabilisation as US Trade Policies Spark BIS Warning

Trade protectionism threatens to fragment the worldwide economy and heighten the risk of financial turmoil centred on the global bond market, according to a stark warning from the Bank for International Settlements (BIS).

The organisation, widely recognised as the central bank of central banks, has emphasised that current global trade policies are accelerating economic fragmentation whilst raising significant financial stability concerns. Their analysis spotlights the expanding government bond market as a crucial vulnerability, particularly due to hedge funds’ increasing involvement in leveraged bond purchases.

Recent market turbulence emerged following President Trump’s “liberation day” tariffs on 2 April, triggering a dramatic surge in US treasury yields and subsequent dollar decline. The volatility forced a partial policy reversal, with the White House implementing a 90-day tariff pause for most nations.

The British gilt market faces heightened susceptibility to market shocks, as highlighted by the International Monetary Fund, due to speculative hedge fund activity replacing traditional long-term investors such as pension funds. This structural shift has introduced new risks to market stability.

The BIS report emphasises that impending US tariffs, scheduled for implementation after 9 July, could represent a significant step towards greater trade fragmentation. The organisation warns that these measures risk diminishing productivity growth as global supply chains face mounting pressure.

Market responses have been telling, with the dollar reaching a three-year low amid investor sell-offs, despite concurrent rallies in stocks and bond prices. The BIS has also raised concerns about the $111 trillion global foreign exchange swap market, predominantly controlled by dollars and shadow banking institutions.

The organisation’s assessment underscores the need for enhanced international cooperation, particularly among central banks, as financial conditions become increasingly sensitive to global risk factors in an evolving market-based financial system.