The bond market is acting weird. It spooked Trump

New York
CNN
 — 

Global markets are reeling over President Donald Trump’s haphazard approach to tariffs and an escalating trade war with China. Stocks have been volatile, and an unsettling shift has emerged in the bond market.

Earlier this week, as stock markets around the world declined, US Treasuries also sold off. Stocks and bonds declining in tandem raised red flags.

Typically, when investors sell off stocks in times of crisis, they pile into US Treasuries, seeking the safety of an asset backed by the full faith and credit of the US government.

Yet as stocks declined, investors abruptly sold off US Treasuries, raising questions about how much they value the promises made by the US government to pay its debts amid concerns about how tariffs will impact economic growth.

The sell-off in bonds was so unsettling that it spooked the White House.

“People were getting a little queasy,” Trump said Wednesday as he told reporters he was watching the bond market.

“The bond market is very tricky,” he said.

While previous outcry from Wall Street, economists and lawmakers had yet to make Trump step down on tariffs, it was the turmoil in the bond market that made him blink and delay many of his tariffs.

“The ‘blink’ came sooner than we expected, probably forced by the markets,” said Mohit Kumar, chief economist and strategist for Europe at Jefferies, in a note Thursday. “The reversal is in sharp contrast to the fanfare with which Trump unveiled his tariff policy just a week ago.”

The yield on the benchmark 10-year US Treasury note spiked as high as 4.5% on Wednesday. It was a whiplash reversal after falling below 4% and hitting its lowest level since October just days before. Yields and bond prices trade in opposite directions.

US Treasuries are considered one of the safest corners of the market. It’s where investors park their cash during economic turmoil and bouts of uncertainty. When stocks and bonds decline together, investors get spooked about broader economic stability. The trend is so unusual it’s associated with moments of extraordinary uncertainty, like the pandemic and the 2008 financial crisis.

Wall Street veterans were blunt about how the bond market forced Trump’s hand.

“The bond market spooked the president,” Ed Yardeni, president of Yardeni Research, told CNN’s Matt Egan. “Bond vigilantes were screaming that they weren’t happy with what was going on, and there was a potential for a recession.”

Trump’s shift on his reciprocal tariffs serves as a stark reminder of the power and influence of the bond market — which can receive less attention than the stock market. While Trump watched stocks decline, it was a sell-off in Treasuries that forced him to move.

“The Bond Vigilantes have struck again,” Yardeni said in a note.

Bond vigilantes refer to investors who threaten to sell or refuse to buy government bonds, often to express dissatisfaction with government policy. Less demand for bonds means lower prices, which means higher yields — and a higher borrowing cost for the government.

It’s an example of how bond markets can signal to a government it must shift policy or face higher borrowing costs. For a recent example, just look at former UK Prime Minister Liz Truss.

Democratic political strategist James Carville famously said in the 1990s: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

National Economic Council Director Kevin Hassett said bond markets played a role in Trump’s tariff pause Wednesday but did not cause “a panic move.”

“And I think you know, the fact that the bond market was telling us, ‘Hey, it’s probably time to move,’ certainly would have contributed at least a little bit to that thinking, but it wasn’t the bond market that made a panic move,” Hassett told CNBC.

In a Fox Business interview Wednesday, Treasury Secretary Scott Bessent dismissed the moves in the bond market as “uncomfortable, but normal.”

UBS said Tuesday that investors were selling bonds to raise cash to cover losses on…