Even as stocks plunged in reaction to his administration’s sweeping tariffs, President Trump expressed confidence in his trade policies, saying last week that “markets are going to boom.” But by Wednesday, a collective thumb’s down to the tariffs by bond investors had given Mr. Trump pause.
With U.S. and global financial market tumbling, he abruptly suspended his administration’s “reciprocal tariffs” on dozens of other countries for 90 days, acknowledging that the bond market was “getting a little queasy.”
Mr. Trump’s about-face was by no means the first time a sitting American president had blinked in the face of bond investors expressing alarm over U.S. policies they viewed as fiscally reckless and harmful to their portfolios. In their first terms, both Bill Clinton and Barack Obama also found themselves knocked back when the bond market rebelled at the cost of some of their strategic priorities.
The “bond vigilantes” ride again
Americans might think of bonds as a less risky asset class they turn to in their 401(k)s to offset more volatile investments, such as stock. But the $2.8 trillion Treasury market is also a bedrock of the U.S. government. The federal government finances the country’s debt by selling Treasury bills to investors, who prize the asset because of the country’s sterling credit rating and its guarantee of making good on interest payments.
As the Trump administration’s reciprocal tariffs went into effect on Wednesday, the bond prices slid and the yield on 2-year Treasury notes rose by as much as 0.3 percentage points, marking the biggest intraday move since 2009, according to financial data firm FactSet (Bond prices move in inverse relation to their interest rates, or yields.)
Such sudden moves can signal that investors are dumping their bonds. That pushes bond prices lower but increase yields, which are the returns that bond holders pay to investors.
“Why is this happening? Fixed-income investors may be starting to worry that the Chinese and other foreigners might start selling their U.S. Treasuries,” economist Ed Yardeni said in an April 8 research note.
Yardeni, who coined the term “bond vigilantes” in the 1980s to describe fixed-income investors who express their disapproval of government policies by dumping Treasuries, added that the bond market was cautioning that “the Trump administration may be playing with liquid nitro.”
In another report after Mr. Trump announced the tariff pause, Yardeni noted, “The Bond Vigilantes have struck again. As far as we can tell, at least with respect to U.S. financial markets, they are the only 1.000 hitters in history.”
Some Trump administration officials acknowledged that the bond market’s hostile reaction to the tariffs influenced the decision to pause the tariffs.
“[T] bond market was telling us, ‘Hey, it is probably time to move’,” White House National Economic Council Director Kevin Hassett said on CNBC on Thursday.
Soon after Mr. Trump announced his April 2 tariffs, economists raised concerns about the potential impact of Mr. Trump’s tariffs.
The president claimed the tariffs, which he called “reciprocal” because they were aimed at equalizing the trade barriers between the U.S. and its trading partners, would help revive manufacturing to the U.S. and raise revenue for the federal government.
But experts warned that the tariffs, which ranged from a baseline 10% for most nations up to more than 100% for Chinese imports, raised the risks of a recession and would likely reignite inflation. Investors dumped stocks and bonds as they digested the economic risks of Mr. Trump’s tariff barrage.
While the stock market plunge hurt millions of Americans’ retirement savings, the turmoil in the bond market creates very real pressures on the nation’s finances. Because the Treasury Department pays interest to debt holders, any increase in yields puts more financial strain on the nation’s coffers.
“Developments in the last 24 hours suggest we may be headed for serious financial crisis wholly induced by U.S. government tariff policy,” Harvard University economist and former Treasury Secretary Lawrence Summers said in an April 9 thread on social media.
He added, “Long-term interest rates are gapping up, even as the stock market moves sharply downwards. This highly unusual pattern suggests a generalized aversion to U.S. assets in global financial markets. We are being treated by global financial markets like a problematic emerging market.”
An expensive problem
Given the size of the Treasury market, the surging bond yields and broader market turmoil could create an expensive problem for the federal government. For Mr. Trump, the timing was especially poor as he pushes Congress to pass an extension of his 2017 tax cuts, which are forecast to cost trillions over the next decade.
In 2024, the U.S. spent more than $1 trillion to service its debt, more than double its roughly $500 billion in 2020, according to Treasury data. That’s largely due to higher interest rates engineered by the Federal Reserve to battle the post-pandemic surge in inflation.
An increase in bond yields could add to that expense, putting even more pressure on the federal budget.
“Although President Donald Trump was able to resist the stock market selloff, once the bond market began to weaken, too, it was only a matter of time before he folded on his eye-wateringly high tariffs,” noted economist Paul Ashworth of Capital Economics in an April 9 research note.
