For many investors, the bond market is like the dark side of the moon — a mysterious and unknown landscape. While the turmoil in the stock market made all the news headlines as President Trump announced larger-than-expected tariffs, the real danger to world order was lurking in the bond market. It was not stock market volatility that made Trump put the tariffs on hold — it was rising Treasury yields.
The week ending April 11th will go down in history as among the most dramatic and significant weeks in financial markets, regardless of what happens next. Higher tariffs on imports from 57 countries, ranging from 10% to 50%, were scheduled to take effect on April 9, but in an abrupt reversal later the same day, they were suspended for 90 days, bringing tariff levels to a universal 10%. China was not included in the pause, and instead, tariffs on their exports were raised to 125%.
While Share market volatility spoke to the extreme uncertainty of the global economy’s direction, the bond market pointed to a profound shift in capital flows.
Stocks are generally seen as a risky type of asset, while bonds are known as a “safe haven,” with the two typically moving in opposite directions. That’s because government bonds — a type of security sold to help finance expenditures, to be paid back to buyers with interest over a set period — are backed by the full faith and credit of the United States.
But US Government bonds have been selling off (yields have been rising) while stocks have plunged. Rising yields suggest dwindling appetite to own the debt among investors, which can be influenced by a range of factors, including an issuer’s ability to repay. For governments, this reflects on the prospects for the country’s economy and finances.
Furthermore, the value of the US dollar relative to other global currencies has nosedived. Economic theory suggests that big tariffs should make the dollar appreciate, as there would be less dollars being exchanged for foreign currency. As a result, the theory goes, the dollar appreciates relative to other currencies.
The chart below shows the sudden rise in US 10-year Treasury yields, and also the drop in the US Dollar index[1]. This is unusual, and the sudden shift in investor preferences is a warning sign that economists, analysts, traders and investors are still trying to figure out.
Source: investing.com
Soaring yields on Treasurys make it costlier for the federal government to borrow money. It’s also bad news for consumers because the 10-year note’s yield is directly linked to rates for mortgages, credit cards and personal and business loans. Yields rising this fast raise concerns that Trump’s tariff policies may send the US into a recession.
There are several possible explanations for this jump in yields: One has to do with the way hedge funds bet on bond markets, which is all a bit technical; another could be that investors are anticipating an increase in inflation and demanding higher interest rates now so they don’t lose money in the future; and another could be that global investors are losing some of their long-standing confidence in America.
There is no shortage of theories, but the shock of Trump’s geopolitical and tariff policies has managed to undermine the perception of “US exceptionalism” and the role of the US dollar and US Treasuries as the ultimate safe assets. We may well look back at this moment and think of the end of America’s “exorbitant privilege”[2].
After weeks of stock market volatility around the potential impact of tariffs, when the larger than expected tariffs were announced, the real power players on financial markets – the bond traders - took action. As US Treasuries were sold off and the US dollar sank, it was an ominous sign that the world was losing faith in America's global financial dominance.
In explaining his decision to pause reciprocal tariffs for 90 days, President Trump said, "…they were getting a little bit yippy, a little bit afraid". What he really meant was that senior members of the Administration were afraid – very afraid - of a financial panic that could spiral out of control and potentially devastate the economy.
Back in 1993 Bill Clinton was forced to abandon his ambitious spending plans when bond rates jumped from 5 to 8 per cent. His Chief of Staff James Carville later said, “… if there was reincarnation… I would like to come back as the bond market. You can intimidate everybody”. Donald Trump was not swayed to put his tariff plans on hold by “yippy” stock market volatility. It was the bond market
What does all this mean for investors? As always, there is a lot of media attention on stock and bond market volatility when it happens, but volatility is just a regular and normal part of investing. Bond yields have already come back down since the tariffs were put on hold, and anyone looking at a longer-term chart of US Treasuries will hardly notice the blip that signifies the sudden spike in yields. While the bond market made Trump blink, it is behaving exactly as it should as the market works through the uncertainty of Trump’s ever-changing tariff policies.
Steve Garth
April 2025
[1] The U.S. Dollar Index (known informally as the "Dixie") is a measure of the value of the United States dollar relative to a basket of U.S. trade partners' currencies, where the Euro has the most weight but does not include the Chinese Yuan.
[2] The term “exorbitant privilege” refers to the benefits the United States has due to its own currency being the international reserve currency.