Trump and the Bond Market
It's easy to view stock market volatility as the reason why Trump quickly doubled back on his promise to keep country-specific trade tariffs in place.
Share prices and indices are easy to monitor and understand. In reality, it was more likely that rapidly rising bond yields forced his hand.
For decades, US treasury bonds and the dollar have been seen as safe havens for investors in times of stock market volatility. In theory, there should have been a flight to US bonds when US equities tumbled on 'liberation day'. Not only did that not happen, there was a mass sell off of US bonds. Yields rising, as they did sharply, means values are falling, a clear indication that confidence in US government issued bonds was severely dented by Trump's tariff announcements.
Bond markets exerting political pressure is sometimes credited to 'bond vigilantes', economically savvy bond holders who sell or demand higher yields in protest against what they view as unsound government policy which puts them at greater risk in the normally low risk, highly liquid U.S. Treasury market. Whether it is as coordinated as this or just the same mass panic we saw in stock markets, the result was the same political pressure we saw in the UK, following the Truss/Kwarteng budget in 2022.
In the UK there was a mechanism to remove Truss, which was used such was the damage caused and perceived need by her party to restore some confidence in the market to head off a major financial crisis. In the US no such mechanism exists and given Trump's penchant for grandstanding and wilful disregard for quiet diplomacy, there will now be months if not years of uncertainty baked into the US and, because of its size, global financial system.
There is another major problem looming later this year for Trump, and a bond market with rising yields has worsened his hand significantly. The yield is the interest payable on a bond. A mass purchase of US bonds would have reduced government borrowing costs, and there is $9.2trn of government debt to refinance later this year. Initially it looked like this was working in Trump's favor, but this changed by Monday 7th April and by Wednesday 9th April thirty-year treasury yields hit 4.92%, their biggest three-day jump since 1982. Bond markets globally were similarly affected, including the UK's 30 year gilts, which responded in a similar way to Trump's policy as they did to Liz Truss'. Even the dollar has suffered.
If yields had dropped, the Fed would be under more pressure to drop interest rates again. Trump has been publicly and unsuccessfully applying pressure on Fed chair, Jerome Powell, to do just that. Mortgage rates would drop and Trump's refinance of government debt would look more comfortable. Now he is back at the negotiating table over tariffs with the US' two biggest creditors, Japan and China, amongst others, after both private and institutional investors, equity and bond holders alike, have given a public display of no confidence in his economic strategy.
Despite a brief market rally when he announced the 90 day pause on additional tariffs, the persistence of the flat 10% tariff on all countries, the uncertainty around what will happen next, and the prospect of an escalated and protracted trade war with China does not bode well. Financial markets demand predictability to thrive. He cannot be removed and does not need to face the electorate again, so it is difficult to know how he will respond as he tries to recover his reputation and his presidential legacy. That is what concerns us all most.