Why everyone is worried about the bond market — especially Donald Trump
Last week, United States President Donald Trump pushed pause on the sweeping “Liberation Day” tariffs he had placed on more than 50 countries earlier in the month. Stocks had plunged in response to the original plan, spooking investors and Wall Street. But it was activity in the bond market, which threatened to drive borrowing rates higher, that market watchers say prompted the stunning about-face from the White House. Here, the Financial Post explains the bond market and why it sent Trump running.
What happened in the bond market?
Immediately after Trump’s April 2 announcement of sweeping “reciprocal” tariffs on U.S. trading partners, bond yields fell along with stocks, but then yields began to steadily rise, the opposite of what is expected. It was “not normal behaviour,” Douglas Porter, chief economist at Bank of Montreal , said.
The yield on 10-year U.S. Treasuries rose to 4.5 per cent from 3.9 per cent, while the yield on even longer-term bonds — 30-year — briefly traded above five per cent. Bond prices and yields move in opposite directions, and rising yields (lower prices) are an indication that the underlying instrument is considered riskier.
Activity in the bond market after Trump’s tariff announcements suggested investors believed there was a greater risk of both recession and inflation in the U.S. as a result. JPMorgan Chase & Co. chief executive Jamie Dimon warned of both, telling a conference of institutional investors in New York that stagflation was the worst possible outcome and he wouldn’t rule it out.
Who were the sellers?
Some of the selling was understood to be related to investors covering stock market losses and obligations such as margin calls. There have also been reports that some governments may have sold U.S. Treasuries in an effort to put pressure on the government to reverse course on tariffs, which were contributing to concerns about a global economic slowdown.
A term coined in the 1980s, “bond vigilantes,” refers to investors who sell bonds as a form of pushback against fiscal policies they consider inflationary or otherwise irresponsible in an attempt to force a policy reversal.
“It could be a bit of all, but the most common explanation is it’s hedge funds getting out of leveraged Treasury trades,” Porter said.
Did bond sales influence Trump?
Administration officials sought to claim victory with promises that the tariff threat alone was bringing countries to the table to pursue new trade negotiations with the U.S., but Trump acknowledged that he was watching the bond market. He said it was “tricky” and that it appeared “people were getting a little queasy.”
U.S. Treasury Secretary Scott Bessent said their goal was to get long-term rates down, which made the fact that yields were rising “a real problem,” Porter said.
Why is the bond market so important?
U.S. Treasuries are the global lending market benchmark, used by banks around the world to price other instruments, so unusual activity in that bond market can have ripple effects on a host of other markets. With bond yields used to price everything from mortgages to complex derivatives, risk was rising that a broader financial crisis could develop and trigger defaults by financial institutions.
“There is no more important long-term rate than a 10-year U.S. Treasury bond,” Porter said. “Long-term yields also drive mortgage rates, so the backup is a problem for the housing market.”
Moreover, the bond yield represents the interest cost on U.S. government debt, so the higher it goes, the more it eventually costs Washington to service its debt.
Has this happened before?
Yes and no. Many are drawing comparisons to the United Kingdom under the short mandate of British prime minister Liz Truss. In 2022, she announced a mini-budget with large tax cuts, spooking bond markets because the cuts were to be paid for using borrowed money.
The news sent the country’s bond yields soaring and the pound plunging, raising concerns about a widening financial crisis. Pensions were particularly hard hit and left Truss with little choice but to resign, leaving a legacy as Britain’s shortest-serving prime minister.
Porter said there are some comparisons, but Truss’ moment was caused by an expansionary budget that the market viewed as unsustainable. He sees a closer parallel to 2020, when long-term yields on U.S. Treasuries shot up in March at the start of the COVID-19 pandemic as markets were very volatile and mostly weak.
This prompted the Fed to step in, and it has indicated it will do so again “if things get disorderly,” he said. “The difference this time from COVID is that there is a sense that U.S. assets are being shunned, or could be shunned, by foreign investors.”
What is the bond market saying now?
Yields pulled back some after Trump agreed to pause the most extreme tariffs for 90 days. But a baseline tariff of 10 per cent remains in place, so yields remain elevated.
“There is clearly still a lot of concern over this highly unusual rise in Treasury yields at a time of equity market weakness and global concern over recession,” Porter said. “Notably, the backup in yields was mostly driven by rising real yields and not higher inflation premiums … indicating a more fundamental drop in demand.”
Avery Shenfeld, chief economist at CIBC Capital Markets, said the backup in bond yields will keep U.S. mortgage rates at elevated levels.
“Housing had been one of the exceptions to an otherwise strong U.S. recovery in the past two years,” he said. “Unless the recent sell-off in bonds reverses, expect these headwinds in the housing sector to remain in place.”
• Email: bshecter@postmedia.com
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