Tariff chaos tests the status of Treasury bonds as a haven of safety
Ever since Donald Trump started ratcheting up tariffs and threatening dramatically higher ones, two narratives have emerged about the American president. To many outside his administration, his tariff strategy seemed zig-zag, chaotic and poorly planned. To his supporters, the bluff and feints were all tactics of a master negotiator taking on the world’s trade cheats.
For Americans, the debate boiled down to this: Do you trust President Trump?
After a momentous week, that question has suddenly become international. And it’s no longer personal. Foreign governments, banks, companies, and investors are all asking: Do you trust the United States?
Why We Wrote This
International anxiety over tariffs is being reflected in the bond market. Investors appear less willing to hold U.S. Treasury bonds. Amid the jump in interest rates, President Trump retreated by pausing many of his tariffs.
The question has emerged from an unusual place. While the stock market was in the midst of yet another meltdown, the normally staid bond market began to gyrate wildly. Triggered by a sell-off of Treasury bonds, the 10-year bond yield jumped by 17.2 basis points, briefly hitting 4.5%, the biggest hike in a year. The 30-year yield rose by 20 basis points, a one-day hike not seen since 2020, when pandemic panic set in. Those higher rates signal that, for the moment at least, investors have less trust in the U.S. than they did a week ago.
Such moves are rare. Normally, when stock markets plunge, investors plow their money into Treasuries. Those bonds, which are sold to the public, are how the U.S. finances its debt. Backed by the world’s largest economy, that debt is considered one of the safest places to invest.
The turmoil suggests global markets have “lost faith in US assets,” a Deutsche Bank analyst wrote in a note Wednesday. “We are entering unchart[ed] territory in the global financial system.”
Whether this loss of confidence is a blip or something longer lasting remains unknown. What is clear is that after the bond gyrations started, Mr. Trump backed down. On Wednesday, he announced a 90-day pause on most of the worldwide tariffs he had just imposed. (The exception, China, got even higher tariffs.) The bond market eased. And for a day at least, a relieved Wall Street staged the biggest one-day rally in more than 15 years.
His retreat did little to resolve the debate over Mr. Trump’s trade tactics. Did the master negotiator push hard for the best deal he could and beat a strategic retreat when the markets revolted? Or, blindsided by the bond market revolt, did he panic?
“Trust in Donald Trump,” Peter Navarro, the president’s trade adviser, told ABC News on Wednesday. “We've got over 70 countries lined up to make a deal that will involve [them] stopping cheating America.”
Many economists are skeptical. “They haven't fully done their homework,” says Jeffrey Schott, senior fellow at the Peterson Institute for International Economics, a Washington think tank. “A businessman would probably be aghast at the amount of strategic planning that has gone into this process.”
The turmoil in bond prices comes at an important time, when Congress is weighing major tax cuts and a budget under which national debt would keep rising for years to come. The U.S. Treasury Department will be refinancing sizable portions of the $28.82 trillion publicly traded debt this year. If interest rates go up on that debt, it will ultimately cost U.S. taxpayers more.
Up next is the question of where tariff rates will settle. For the next 88 days, as negotiations continue, President Trump has dropped the near 50% tariffs he had announced last week for dozens of countries and opted for a 10% tariff for most nations instead. The exception is China, where he imposed further tariffs this week, after China struck back with tariffs of its own. The U.S. rate for its rival now stands at a staggering 145% while China has imposed 125% on incoming U.S. goods.
Neither of the geopolitical rivals has yet to back down. Since the U.S. imports far more from China than China does from the U.S., Mr. Trump may have more leverage on traded goods. But recent days have been a reminder that Beijing has leverage of its own beyond traditional goods.
China, the world’s second-largest film market, announced Thursday that it would moderately restrict imports of Hollywood films. The Asian super power also holds some $750 billion in U.S. Treasury bonds, which could pose further problems for the Trump administration should it begin selling them in earnest.
