The tit-for-tat tariff war between President Trump and China hit a deep nerve in the Treasury market last week as trade war tensions were peaking, thereby sparking fears of inflation and economic instability. This follows reports of overseas investors offloading U.S. Treasuries due to ongoing concerns about the economy and a sharp selloff in the U.S. dollar that hit its lowest level against the Swiss franc in a decade.
The greenback has shed 10% in three months, with nearly 5% of the loss coming in the past two weeks. In the currency world, this is absolutely dramatic. The $28.6 trillion U.S. Treasury market is the lifeblood of the global financial system, and the dollar is the world’s reserve currency. Seeing the yield on the benchmark 10-year Treasury spike from a recent low of 3.91% to 4.49% as of last Friday is also just as dramatic, and not in a good way.
The 30-year Treasury long bond nearly breached 5% before settling at 4.87%. There were reports of forced selling from large institutional investors that had to unwind leveraged positions, especially on the longer-dated maturities. The situation became so severe that President Trump paused the steepest tariffs for 90 days, hoping to stabilize the markets. He used the term “yippy” to describe the nervous reaction of investors and markets during the bond market turmoil.
To call the fire sale conditions of the selling in Treasuries “yippy” is in my view disingenuous and dangerous. There was a real risk in triggering systemic selling pressure. To add further angst to this casual reaction, Treasury Secretary Scott Bessent came out to publicly claim that the 90-day pause on tariffs was part of Trump’s negotiation strategy from the beginning. Critics argue that the sudden reversal seemed more like damage control after market turmoil and public backlash as bond spreads gapped wider, which was anything but “yippy.”
Bond spreads, or the cost to borrow, widened significantly, marking the biggest one-week increase since the 2023 regional banking crisis. The volatility was largely driven by uncertainty in the corporate bond market that led to a sharp rise in borrowing costs on top of Chinese and other Asian funds offloading Treasuries in high volumes. The takeaway from the chaos is that Trump and Bessant have lost some credibility in the bond trading pits for sure.
Both the bond market and the stock market have become trigger-happy against this highly fluid and unpredictable environment. It would only take a new headline, or headlines, of aggression from Trump or a trading partners fighting back hard to cause the bond market and the dollar to resume losing value. Even though bond prices have paused their downward spiral, fund flows remain largely negative. Bond investors panicked and remain very unsure about all that has transpired in the Treasury market.
The Federal Reserve was closely monitoring the bond market turmoil last week, as concerns about liquidity and financial stability and stress here can lead to large, rapid shifts in prices that suddenly clog up market plumbing and inhibit its functioning that requires the Fed to step in to provide liquidity. This means ceasing on their current course of quantitative tightening (QT) of shrinking their balance sheet, to turning back on quantitative easing (QE) of growing their balance sheet. Although the Fed did not officially intervene, officials signaled they were “absolutely ready” to step in if market conditions worsened.
Wall Street banks and investors have reported a decline in liquidity, or the ease with which traders can buy or sell assets without affecting prices, as volatility in the Treasury market has intensified. During the 2020 coronavirus crisis, the central bank stepped in amid severe market dysfunction, when key funding markets froze due to concerns over the pandemic’s impact on the global economy. The same fears of a major slowing in global growth from tariffs emerged, and who knows, maybe the Fed did conduct some open market purchases that they have not yet reported.
It also stands to reason that the passing President Trump’s “Big Beautiful Bill” by the House on April 10 contributed to bond market anxiety. The bill is a budget framework that paves the way for tax cuts, military spending, border security investments and energy policy. The vote was delayed due to Republican holdouts who refused to advance trillions of dollars in tax breaks without deeper spending cuts. During the debate on budget, Ways and Means Committed Chaiman Jason Smith (MO-08) put out his list of pros and cons if the bill was not passed.
A final bill could raise the nation’s debt ceiling by as much as $5 trillion, extend President Trump’s tax cuts and add hundreds of billions of dollars in defense and border security spending. Now, the hard work begins as to where the spending cuts and revenues will come from to pay for this massive budget increase. America voted for a balanced budget and a reduction of the federal debt that now stands at $36.7 trillion.
So far, in fiscal year 2025, the government has paid $396 billion interest payments, compared to $350 billion at the same point in fiscal year 2024 due to higher borrowing levels and higher interest rates. Nothing “yippy” about these numbers either. Trump is banking on economic prosperity to pay for it all and reduce the federal deficit. This is a tall order where history has not proved this to be the case. When the government brings in more revenue, Congress raises spending. Changing this behavior is an even taller order.
A big reason the Red Wave happened was because voters were told fiscal discipline will shape the new administration and Congress. Citizens vote every two to four years, but the bond, currency and equity markets vote every day, and it has not been positive, not at all. It is vital that Trump & Co. restore confidence in the markets. Sleeping with one eye open is not how investors want to function. For the vast majority of investors, the volatility has been incredibly stressful and mentally exhausting to manage through. Some real progress on trade and government spending must be accomplished near term to stem the outgoing tide of bond and stock assets into money markets. That time is now.
