What are Bonds? And What do they mean in the current Crisis?

Bonds are also called gilts in the UK and treasuries in the US, it is a financial security which is considered less volatile and safer than stocks for instance, and they are thought to offer a more reliable income stream. They are when an investor loans money, normally to a government, for its safe keeping and return when it ‘matures’. During its stay it can earn the lender a rate of return in interest, fixed or variable, which is known as a coupon. The coupon is for a fixed time, long, medium, or short term, with different benefits attached. After the term, the original loan returns to the lender. The government can use the loan for various social projects.

Bonds produce what is called a yield, the total return on capital. The yield is the coupon rate plus the secondary market rate for the bond. When bond prices go up the yields go down in financial value, they have an inverse relationship. If the interest rates in the market go up, any new bonds that are issued have correspondingly higher coupon rates. So, to attract buyers of bonds, existing bonds with the lower coupon rates need to drop their price, which pushes up their yield to the market level. Thus, the reverse is also true. If bond prices increase on the market, the yields go down relatively. A buyer of a bond on the market can pay less for a bond than it originally was bought for, meaning they obtain a higher current yield given they get the same income flow. Investors can therefore buy bonds at a premium or at a discount, and whichever they buy will determine the yield they receive in income.

What determines the overall performances of the bonds is the wider market and the way it treats the risks of lending to the institutions and governments. Bond ratings are a way that credit rating agencies can assess the credit quality and risk level of bonds.

At the moment there is a global government bond sell-off on the capitalist market, probably due to inflation, the huge government deficits, and the war between the US/Israel and Iran, although the inflation as such is a legacy not of this war specifically, but of the past giant global financial crises which led to bail outs and vast money printing (so called quantitative easing), and which devalued the existing circulating currency, created ‘cheap money’ surplus, and later causing this ‘correction’ as inflation, and this inflation was indeed itself a factor that led to wars, such as also the Ukraine Russia war.

The current global sell off increases the borrowing costs for governments (yields rise) who have to offer higher coupon rates to investor buyers of their bonds. Countries that would like to spend to combat recessions caused partly by inflation are therefore being restricted in their financial movements because of the bond markets, which are also themselves reacting to the inflation and fears of further rises in the inflation rate and other crises. The standard response of governments is tax increases and spending cuts, but of course with already high inflation and following on from previous years of austerity this would be very painful for people.

The US administration also recently, July 31, 2026, intervened in global financial markets (a fairly rare move) to help Japan prop up the value of their currency, which was at a forty-year low, by selling dollars and euros to buy yen. Japan is the largest foreign holder of US government debt. This intervention was at least partly designed to protect the functioning of the US bond market: the US was concerned that Japan’s efforts to raise the value of its currency would affect the US economy by making US government borrowing more expensive in the bond market, because to free up money to buy yen, the Japanese government had been selling US government treasuries, or bonds. As we now know, selling the US bonds in large quantities raises the yield the US government must pay to the bondholders. So, the US thought to remove this necessity of Japan by buying yen.

Trump sees a weak yen as an unfair trade advantage making its goods more attractive on the global market. Interest rates in Japan are below US rates and have not kept pace with inflation, a fact which the US leaders do not like, and the intervention is seen by analysts as a move to force the Japanese to raise its interest rates. However, Japan relies on energy imports from the Middle East, the war raised the prices of this oil and so added to inflation. Japan tried to sweeten this for its consumers by spending billions subsidising fuel costs, but also the Japanese cost of living is high, and the government had to subsidise food. It has an aging population. Japan’s total public debt now stands at more than 200% of its GDP.

Did this intervention work? In the short term it may have worked, but in the longer term it has been less obviously beneficial, and the effect was short lived. The selling of euros by the US for yen was for the Europeans an unwelcome surprise, while other US policies tend to strengthen the dollar making the intervention redundant and contradictory.

What are Trump's Tariffs?

Tariffs have been put forward as an economic balm for the US by President Trump. It is not so clear what exactly he means by tariffs, or whether he will stick to this policy, but we can make a stab at an explanation.

Most economists regard tariffs as a bad thing, but they are usually short on explanations why.

Tariffs seem to be understood by the new US administration as a way to bring in money, to, in a sense, punish foreign producers who undercut US prices, and to encourage the manufacture and purchase of US made goods and services.

But tariffs are usually placed upon the importer of the foreign goods, not the exporter, and this means in this case the US side, because the exporter is a foreign market, and their prices cannot normally be set by the importing country (the US here). Tariffs are therefore imposed at the point of the local importer. This has consequences: it usually leads to a rise in prices for the imported goods, because the importer now needs to make more money to cover costs.

It is possible that this could encourage more local production and help the local competition for this market, but there are usually good reasons for the foreign produced product being cheaper which may not be able to be repeated locally, it of course depends on many factors, but in any case this is unlikely to happen quickly. So, the immediate result of tariffs would be the inflation of prices in the US.

US citizens are already complaining about high inflation and the cost of living, and this is likely to make things worse.

Tariffs can be understood as a part of economic protectionism, and so perhaps of socialism, but in the capitalist economy it cannot really be socialist unless you also subsidise the local industries that you want to support with help from the government (or go the full route and nationalize them). However, this is obviously not the policy in the current US, where the federal government is under attack for being wastefully ‘too socialist’ or ‘woke’. Trump supports the free market inside the US apparently but is not a free marketeer globally.

The hope of this government is that tariffs will help boost local US productivity, somehow left unexplained, in the context of simultaneously stimulating other aspects of the market. The big idea, not a very new one, is to give tax cuts to the rich, who are described here as the ‘wealth creators’ (not oligarchs), and hope that these invest and employ people. Mere hope is not a great policy.

Unfortunately, this is what already failed to happen, by and large, in the last economic crisis when money was printed and interest rates were held very low, and which has led us to this crisis. Investors, of course, may not invest, instead they might squirrel away their wealth, which they are likely to do if they sense a crisis and if there is market uncertainty and volatility.

Meanwhile in the US there is also a parallel attack on illegal or undocumented immigrants, the cheaper labour that the US enjoys. This attack seems to be the partner with tariffs as a mooted solution to the economic crisis. Immigrants and refugees are said by the administration to be stealing US jobs and bringing in harmful drugs and criminality. The wall of tariffs mimics Trump’s border wall supposedly keeping out the immigrants.

However, it is the ruling class that benefits from employing this cheaper and easier to manipulate labour force. And now they also benefit from deflecting any possible blame for the crisis onto these vulnerable people and the ‘weaknesses’ of those on the left who are supposed to have ‘let them in’. It is quite despicable for the rich and powerful to target these unlucky people in this way, but they do it with the help of their media.

The rich class must feel that they have especially lost out on capital since the last crises and the pandemic and wish to claw back this apparently missing wealth and are seeking someone and something to blame for the problem other than themselves and the economic system. This is also an extension of the laying of the blame for the high cost of living on other countries and other persons, old allies and old enemies alike.

The last president, Democrat Joe Biden, did not remove most of Trump’s earlier tariffs, so this policy is not only that of this administration, but of the US bourgeoisie as a whole.

Tariffs are unlikely to stay isolated to one country. Other affected countries will have to respond in some way, the most likely being with their own tariffs, leading to a freezing up of the global capitalist market. The US is the world’s biggest economy though, so perhaps the US administration sees this fact as a buffer in the sense that it is likely to hurt others more than them.

But this can mean a trade war will result. A trade war can lead to greater friction between nations politically, and even eventually to actual war. One can already notice a more aggressive US policy towards foreign parties.