• The US-China trade war poses significant risks, especially for baby boomers in the Retirement Risk Zone, as China holds a stronger trade position.
• Fear is driving up intermediate-long term US bond prices, creating a rare U-shaped yield curve, indicating imminent economic uncertainty.
• The Federal Reserve's quantitative tightening and cessation of long-term bond purchases add to market volatility and potential inflation risks.
• Baby boomers should heed Sequence of Return Risk and consider protective measures to safeguard their retirement savings during these turbulent times.

 The Thucydides Trap refers to the natural, inevitable disturbance that occurs when a rising power threatens to displace a ruling power. The “Trap” is war. For now, it’s a trade war. Because most of our 78 million  baby boomers are currently in the Retirement Risk Zone, they are most exposed to the potential consequences at this time in their lives.

China has the upper hand because it is less reliant on the US than the US is reliant on China. Prices of US bonds reflect the fear underlying this trade war. Intermediate-long term bonds have been bid up as investors move to safety.

Advantage China

According to the Office of the United States Trade Representative and the Visual Capitalist, the following table summarizes US and China exports and imports.

The edge goes to China because only 6% of its imports are from the US while 13% of US imports are from China. According to the Council on Foreign Relations, both importers and exporters can suffer from tariffs, but importers are often seen as bearing a greater burden, especially in the context of the US. Tariffs increase the cost of imported goods, impacting both consumers and businesses that rely on those imports. While exporters may initially try to absorb the tariff costs, they may also face reduced demand due to the higher price.

As shown in the following graph from Mapped: How China Overtook the U.S. in Global Trade (2000–2024), China has become dominant in world trade, so it is a formidable adversary. China is now the dominant trade partner for most of Asia, Eastern Europe, the Middle East, Oceania, South America, and Africa. In other words, China’s economy has plenty of alternative trade partners to the US.

Capital markets have taken “the Trap” seriously, with most attention focused on the US stock market, but bond prices have also been affected as they have been bid up by investors fleeing to safety.

Fear and greed in the US bond market

Be fearful when others are greedy. Warren Buffet

The yield curve for US Treasuries is currently U-shaped, which is very rare. The press has reported that the temporary deferment of most tariffs is due to the reaction of the bond market rather than the stock market. Interest on our national debt could cripple the economy and lead to serious inflation.

Normal yield curves are upward sloping because investors demand a risk premium for taking on the volatility in long-term bonds. Let’s call this “greed” driven.

Sometimes the yield curve inverts to pay higher yield for short term, lower risk, T-bills. This unusual situation tends to precede recessions, so we’ll call this “fear” driven.  Fear is currently driving up the prices of intermediate-long term bonds.

But the yield curve is very rarely both “normal” and “inverted” -- U-shaped. What is going on? One interpretation is that fear is imminent, causing demand for safety to swell near term, but greed sets in at very long maturities to compensate for the high risk.

It’s also worth noting that the Fed is allowing its long-term bond holdings to mature without replacement in order to reduce its balance sheet under quantitative tightening (QT). The Fed is no longer buying long-term bonds in order to manufacture a zero interest rate policy (ZIRP).

Conclusion

These are scary times. No surprise, the typical advice is to stay the course – that it will all work out fine --  but those near retirement should take heed because they could find the rest of their lives undermined by Sequence of Return Risk – losses at this stage in life hurt the most. Most baby boomers are currently in the Retirement Risk Zone. I’ve written in the past about why and how they should protect themselves.

What do you think? What is happening here? What will happen?

More By This Author:

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