It’s The Bond Market That Matters Most

I am convinced that Donald Trump always intended to pause his tariff increases on most countries at some point in his strategy to remake the international system of trade. 

However, I do think that the timing of that pause was somewhat driven by what was happening in the markets, just not the stock market. It was the bond market collapse that dictated the timing.

What just happened in the U.S. Treasury market? https://t.co/dmlZk2UKkH pic.twitter.com/2he8K57ypW

— Reuters (@Reuters) April 10, 2025

Trump is walking something of a tightrope on this issue. He is convinced that the current international order under which world trade is hollowing out America’s economy, transferring wealth from ordinary Americans to the investor class and finance, which have been enormous winners over the past few decades as the middle class–especially those in the industrial heartland–have been hammered. 

“Learn to code” became a common refrain from the winners, who argue that America’s policies have increased GDP and created a laptop class and world-beating finance returns and that the path to prosperity is to join that class. Trump, for a variety of reasons, rightly believes that a service economy creates a world where there are serfs whose job it is to make life better for the masters. Not only is this grotesquely unfair, but it leaves America vulnerable in the long run as we become ever more dependent on our adversaries for even basic goods like military components, pharmaceuticals, and even prosaic items like clothing and high-tech manufacturing. 

I’ve been trying to find a post to put this video in and have failed because it is 20 minutes long and I don’t want to just summarize it. But if you have the time this is a good explainer on how we got where we are and what the Trump team is trying to do with their assaults on the current trading regime. If you have the time, watch it. 

This is one of the best NPOV explanations I’ve seen of the Trump tariffs and how they fit into his strategy to create a new global security and economic order, whether you agree with it or not. @JoeriSchasfoort pic.twitter.com/zMRAR4Xxsg

— Michael Shellenberger (@shellenberger) April 9, 2025

Trump clearly has a strategy that includes hammering people out of complacency, and was willing to endure a stock market shock as a price to pay for longer-term rebalancing of trade relations–something he believes is necessary to retain American dominance. 

But part of that strategy included driving down interest rates as well, to reduce the burden of interest on our debt. Interest on the debt is driving up debt, ironically, as we borrow from Paul to pay Paul the interest on what we borrowed from Paul in the first place. It is like using a credit card to pay credit card debt. 

Bond markets played along until they didn’t. People moved money into “safer” Treasuries, but a bond market selloff reversed that trend and created a potential disaster. A disaster that Trump was hoping to avoid. Needed to avoid. A crashing stock market he could and was willing to endure. A crashing bond market on top of that he could not. 

That, I believe, is why Trump decided to pause tariffs yesterday instead of dragging things out a bit longer. 

…The Treasury market is crucial to financial market stability at home and abroad.

A government can raise revenue to fund spending through income such as tax receipts or borrow money on the bond markets.

Not only does it face higher borrowing costs it there’s a bond selloff but those increases filter across to mortgages and corporate loans, spreading out the economic damage.

The 30-year mortgage rate for instance is benchmarked to 10-year Treasuries , which surged by more than 20 bps at one point on Wednesday – before the tariff pause brought calm.

Yields on U.S. corporate bonds, which are priced off of U.S. Treasuries, have shot up. Yields on U.S. junk bonds closed Wednesday nearly a percentage point higher than a week ago at 8.38%, an ICE BofA index shows (.MERH0A0), opens new tab

What will this remaining 10% then mean for UK and European companies?

Higher Treasury yields also pushed up borrowing costs across the globe, a headache for countries such as Britain or France that are already grappling with high amounts of debt.

Heavily indebted Japan’s 30-year bond yield this week surged to 21-year highs, and Britain’s 30-year bond yields hit their highest since 1998. Both were below those peaks on Thursday , .

HOW BAD WAS THE STRESS?

The speed and the scale of the selloff in Treasuries meant signs of dislocation emerged as hedge funds unwound some debt-fuelled bets.

While market participants, who include brokers, traders and investors, said the selloff was orderly, indicators such as bid-ask spreads — or the difference between buyers’ and sellers’ price offers — widened on Wednesday before Trump’s announcement. One trading desk said the bid-ask spread was double its normal levels.

There was a HUGE swing in the bond markets between Monday and Wednesday, and that was much more destabilizing than the stock market swings. Most people don’t trade stocks daily, so if the market dips and comes back in a reasonable time, few people actually lost real money. That some did is not irrelevant, but it is not economy-threatening, and if by the 2026 elections the market is significantly higher then this blip won’t matter much. 

But a collapse in the bond market could cause an actual economic crash in the real economy, because bonds underpin so much of our economy. Investments are driven by bond prices. The ability of governments to function are too. And world currency prices and political stability depend largely on an orderly bond market. The Fed moves the economy through manipulating interest rates. 

Wild swings are dangerous, in other words, in a way that temporary swings in the stock market are not so much. We watch stock prices because they impact us personally, but bond prices rule the world. 

Because of this, many people are saying that Trump blinked on tariffs, but I think that is wrong. I believe that pausing tariffs to give time for negotiations was always part of the plan–threatening to break the current system and force a reset, which is Trump’s goal–and he succeeded in that. The exact timing was likely driven by the bond markets, but the act itself was not. 

As you can see in the video, which I believe is largely correct in broad strokes, Trump’s advisors have written extensively about exactly this plan, and Trump seems to be following it closely. Trump sees what he is doing as roughly similar to what has happened twice since World War II–resetting the rules to advantage America. 

Will the strategy work? We have yet to see. But is there a plan? Yes. And Trump’s move yesterday was part of the plan.