Alarming declines in the stock market and recession warnings didn’t faze President Trump after he announced steep tariffs on dozens of countries. But tremors in the market for U.S. government bonds made him flinch.
This revealed Mr. Trump’s pain point, showing what it took to force him to alter a signature economic policy. He had been watching the bond markets, he told reporters, and thought investors had gotten “a little queasy.”
These episodes suggest that what the White House is able to achieve during Mr. Trump’s second term may largely depend on how the bond market responds, setting up a tug of war on trade policy, tax cuts and more.
U.S. government bonds are essentially loans to the Treasury, considered one of the safest bets in finance. These bonds comprise an enormous, multi-trillion-dollar market that everyone from individual investors to pension funds, multinational companies and even foreign governments invests in.
That’s why sharp moves can be so stomach-churning, including for the president of the United States. Waves of selling after Mr. Trump’s on-again, off-again tariff pronouncements have put investors on edge, even after the market recently stabilized somewhat.
The bond sell-off has also been accompanied by a decline in the value of the dollar. That has fueled fears that investors may be souring on the United States, long the unquestioned focal point of the world economy.
“If you were investor, would you want to invest a country being run like this? The question answers itself,” said Joseph Gagnon, a former senior official at the Federal Reserve who is now at the Peterson Institute for International Economics.
If bond trading can exert so much influence over Mr. Trump’s policies, it’s important to understand what is going on in that market. Let’s start at the beginning.
Bond basics: Meet the U.S. Treasury market
U.S. government bonds, which are issued by the U.S. Treasury, are backed by the full faith and credit of the U.S. government. They have long been seen as some of the safest assets around. The strength of the U.S. economy and global demand for dollar-denominated assets has made it relatively easy for the government to consistently find buyers for its bonds, also known as Treasuries.
The interest rates on Treasuries determine how much it costs for the government to raise money to spend on its priorities.
These bonds, known as Treasuries, are a cornerstone of many portfolios, offering reliable if unexciting returns for investors. U.S. government bonds also influence the pricing of many other types of debt — including mortgages, credit cards and business loans. There are roughly $28 trillion Treasuries outstanding.
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Further reading: Which Interest Rate Should You Care About?
What was so alarming about recent market moves?
Bonds have prices that go up and down, but their performance is usually expressed in terms of yields, or the return an investor expects as a percentage of the bond’s face value. In the government bond market, the yield roughly reflects what investors think a fair interest rate is at a given moment.
Yields move in the opposite direction to prices, so when lots of investors sell bonds yields go up and prices fall. The yields on Treasuries typically move very little day to day, often by only hundredths of a percentage point.
But a spate of selling recently pushed the yields on the 10- and 30-year Treasuries up by about a half a percentage point over the course of a week, the biggest spike in decades. Such sharp moves are destabilizing for investors, and ominous for economic reasons: Rates on mortgages and car loans are related to the 10-year yield, while the 30-year Treasury is a popular holding among pension funds and insurance companies.
While U.S. government bonds recouped some of their losses recently, sending yields somewhat lower, the scope and scale of the recent spike has had widespread consequences. It also runs counter to the Trump administration’s goal of lowering interest rates.
Who has been selling Treasury bonds?
Just about everyone owns Treasuries, including individual investors, financial institutions, companies and other governments.
The Fed holds a lot of the bonds, accounting for the bulk of its more than $6 trillion balance sheet, which it started accruing during the 2008 global financial crisis. The Fed is in the process of shrinking its holdings by not reinvesting when the bonds it owns mature.
Foreign governments are also major holders of Treasuries. Japan is the largest, with more than $1 trillion. The next largest in China, which holds $760 billion.
The recent bond sell-off has many possible explanations. Investors could be selling bonds to raise cash to cover losses in the stock markets. The unwinding of a complex bond trade popular among hedge funds that involves futures contracts may also account for some of the selling.
And there are some who fear that foreign governments could be paring their holdings in retaliation for U.S. tariffs. Treasury Secretary Scott Bessent said this week that there was “no evidence” that foreign governments were selling Treasuries in large quantities.
Given the size of China’s bond holdings and other dollar-denominated assets, “deliberately precipitating a sell-off would be self-harming,” Mark Williams, the chief Asia economist at Capital Economics, wrote in a recent note.
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Further reading: Trump Has Added Risk to the Surest Bet in Global Finance
How bad could it get?
Bond investors have a fearsome reputation. The market strategist Ed Yardeni coined the term “bond vigilantes” in the 1980s to describe investors who punish governments for policies they think are bad for bonds.
The political adviser James Carville made a famous remark after the bond market forced former President Bill Clinton to change his economic policies, saying that if he could be reincarnated, “I would like to come back as the bond market. You can intimidate everybody.”
For a recent example of a world leader laid low by the bond market, look at Liz Truss. She became Britain’s shortest-serving prime minister after she set off market turmoil in 2022 with her proposal of deep tax cuts financed by significant government borrowing. British bond yields spiked and Ms. Truss was ultimately forced out of office over fears of a government credit crisis.
There are several important differences between that episode and what’s happening in U.S. bond markets, but “the biggest similarity is a crisis of competence,” said Kenneth Rogoff, a professor of economics at Harvard.
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Further reading: When Elected Leaders Pursue Risky Policies, What Can Stop Them?
Why is the dollar falling, too?
Tariffs were supposed to strengthen the dollar, not weaken it. Analysts had assumed that such levies would discourage Americans from purchasing imported goods and that, in turn, would reduce the demand for foreign currency.
Instead, an index that measures the dollar’s value against a basket of other major currencies recently sank to a three-year low.
The moves have been significant enough that Jonas Goltermann, deputy chief markets economist at Capital Economics, warned that it is “no longer hyperbole to say that the dollar’s reserve status and broader dominant role is at least somewhat in question.”
The Fed has taken notice. Neel Kashkari, president of the Minneapolis Fed, said recently that the combination of higher government bond yields and a weaker dollar “lends some more credibility to the story of investor preferences shifting.”
There are economic reasons to explain why the dollar has fallen. U.S. assets have in recent years outperformed the rest of the world because the American economy was doing significantly better. Investors seeking higher returns were drawn to the dollar, further buoyed by the fact that the Fed appeared inclined to keep interest rates higher relative to other central banks in advanced economies.
Mr. Trump lashed out this week at Jerome H. Powell, the Fed chair, for keeping rates too high for his liking, but privately the president has for months been aware that trying to oust Mr. Powell could inject even more volatility into jittery financial markets.
Now, many economists are bracing for a U.S. recession and even some officials at the Fed have raised the possibility of steeper rate cuts as a result. In that environment, the dollar looks poised to weaken further. In a recent survey by Bank of America, about 60 percent of global fund managers expected the dollar to depreciate in the next 12 months.
Currency experts at Goldman Sachs have argued that the “exceptionalism” of U.S. asset returns risks being eroded if tariffs squeeze companies’ profit margins and dampen consumers’ willingness to spend. That, in turn, would “crack the central pillar of the strong dollar,” they said.
To be sure, there are a lot of reasons to think that the U.S. dollar will continue to play an outsize role in the global economy. The dollar is on one side of nearly 90 percent of all foreign-exchange trades, according to the Bank for International Settlements. Essential commodities, like oil, are also typically priced in dollars, regardless of who is buying or selling.
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Further reading: The Dollar Keeps Falling as Its ‘Safe Haven’ Status Is Questioned
The takeaway, in one quote:
“Overall uncertainty has rarely been higher, but the U.S. bond market and the dollar will be the ultimate scorecard that will decide the end game for this tariff policy. If both continue to weaken, the pressure will mount on the U.S. administration to reverse a large degree of their recent actions. However, if things stabilize, their desire for huge change will keep them on an aggressive path.” — David Folkerts-Landau, group chief economist at Deutsche Bank
Peter S. Goodman, Jeff Sommer and Mark Landler contributed reporting.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
Jason Karaian is the business news director, based in London. He was previously the editor of DealBook.
The post Why the Bond Market Holds Sway Over Trump appeared first on New York Times.
