Published by Global Banking & Finance Review®
Posted on March 11, 2025
4 min readLast updated: January 24, 2026
Add as preferred source on GoogleBIS notes markets' positive response to Europe's defence spending plans, despite US tariffs causing volatility. German bond yields rise.
By Marc Jones
LONDON (Reuters) - Central bank body, the Bank for International Settlements, has refrained from voicing its usual concerns about rising debt, noting markets' positive reaction to Europe's plans to ramp up defence spending in response to U.S. security policy shifts.
The central bankers' central bank as the BIS is known, warned in its latest global report that U.S. President Donald Trump's tariffs led to unusually high uncertainty and market volatility, although it still expects the world's economy to avoid recession.
U.S. bond yields, the dollar and stocks have all fallen in recent weeks on signs the economy there is now slowing, while Germany's dramatic plans to overhaul its debt limits as part of a wider European increase in defence spending has seen the sharpest rise in its bond yields since reunification in 1990.
"Tariffs wrapped in uncertainty are going to be doubly unhelpful," said Hyun Song Shin, economic adviser and head of research at the BIS, referring to both their unpredictable timing and some other policy shifts Trump has made recently.
Commenting on the report in briefing with journalists, Shin said tariffs both hurt consumer and business confidence and could stoke inflation, causing a headache for central banks.
Asked how the market conditions compared to those during the COVID-19 pandemic and the global financial crisis, he said: "I don't think we are anywhere near that."
He said the BIS' "base case" was still for a "soft landing" for the world economy.
U.S. stock market volatility gauges, such as the VIX index also remain well below levels during those crises, Shin said, while the rise in German and European bond yields had a much more positive feel than the spikes seen early in the year.
Whereas the recent spikes in yield were seen as a sign of concern the latest one was accompanied by a strong "risk on" rise in European stocks on the hopes of stronger economic growth in Germany, Europe's largest economy.
"It is still very early days but is it is very notable that the rise in the yields is very different in tone."
He also refrained from the BIS' traditional warning of potential debt risks.
"I think it really depends on the race between the growth trajectory and the debt trajectory," Shin said. "The (German) fiscal announcement could be the harbinger of higher activity."
MAR-A-LAGO ACCORD?
The BIS report also looked at a number of broader market trends.
One section focused on central bank inflation targeting over the last 25 years and increased role other objectives such as employment have played, especially in some advanced economies.
Given the BIS acts as forum for the world's top central banks and helps manage their foreign exchange reserves, Shin was also asked how the institution would react to a possible 'Mar-A-Lago Accord'.
Floated as modern day version of the 1985 'Plaza Accord', economists say Trump could use the threat of tariffs and the lure of U.S. security support to persuade foreign governments to swap their Treasury holdings for cheaper, ultra long-term debt to lower the dollar's value and improve Washington's finances.
"The details are still not really fully sketched out so we will need to see," Shin said, adding that there were obvious questions about how other countries would manage concerted sales of U.S. Treasuries.
Shin's colleague Frank Smets, a former advisor to the European Central Bank's Executive Board also said that "forward guidance" - the practice where central banks hint at future moves in interest rates - was not going to be very effective in current environment.
"You want to move in small steps when you are in an uncertain world," Smets told reporters.
(Reporting by Marc Jones; Editing by Tomasz Janowski)
The article discusses the BIS's observation of market reactions to increased European defence spending amid US policy changes.
US tariffs have led to increased market uncertainty and volatility, impacting consumer and business confidence.
The BIS expects a 'soft landing' for the global economy, despite current market challenges.
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