President Donald Trump is pushing the economy into a recession. The early signs are already apparent with autoworker layoffs in Indiana and Michigan, a stock market sell-off in recent days and Americans pulling back on spending. But as Trump’s tariffs took effect in the wee hours of Wednesday morning, something even more alarming occurred: panic in the bond markets.
The Washington Post
Trump caved on tariffs. It took a scary bond market freakout.
The ‘safe haven’ status of U.S. Treasuries is under review in the Trump era.
April 9, 2025
Investors started dumping U.S. government bonds. They sold and sold and sold. This is not normal. Typically, U.S. government bonds are a safe haven. Whenever stocks tank or there’s turmoil around the world, investors rush to buy plain vanilla bonds from the U.S. Treasury. It’s the equivalent of chicken soup for unhealthy markets. But suddenly, those bonds turned bitter.
Ultimately, Trump caved to the bond markets. He admitted to reporters that “people were getting a little queasy” in the bond market. He didn’t want to follow the fate of British Prime Minister Liz Truss, who resigned in humiliation in 2022 after a similar bond market fiasco in reaction to her policies.
“I have authorized a 90 day PAUSE, and a substantially lowered Reciprocal Tariff during this period, of 10%, also effective immediately,” Trump said on his social media platform.
It’s relief at last, but the potential for more tariffs remains. And the bond market freak-out demonstrates how much damage has occurred already.
There are a lot of reasons investors (likely including some foreign governments) wanted to sell. Some wanted to invest elsewhere in the world; others needed to exit bonds to have more cash on hand. But, at heart, it all came down to the same belief: The United States is no longer looking rock solid. It’s impossible to make sense of what Trump is doing — and it’s not worth the risk of finding out just how much will break because of his actions.
For the United States, the repercussions of all of this could have been substantial — and almost all negative. As investors sold bonds, the yield (the interest rate) soared. The 10-year Treasury yield hit 4.51 percent, up from 3.9 percent earlier in the week, and the 30-year Treasury yield briefly topped 5 percent. This couldn’t be worse for Main Street. It means mortgage rates may top 7 percent again, and borrowing costs for cars, businesses, etc., will surge. It also means the United States government will have to pay even higher interest costs.
“The post Liberation Day mini crisis moved to a more dangerous level overnight with a fairly huge bond sell-off,” wrote Jim Reid, a research strategist at Deutsche Bank. “It will put much more pressure on the U.S. administration than just an equity sell-off.” (Reid was correct: It did up the pressure to a level even Trump could not sustain).
U.S. government bonds are at the center of almost everything that happens in markets. Many investments around the world are priced according to how much more risky they are than U.S. government bonds. Trump took the average U.S. tariff rate from about 2 percent to 22.5 percent — the highest in more than a century, according to the Budget Lab at Yale. That chipped away at the bedrock reputation of the U.S. government. Investors will be wary of going all-in again on U.S. bonds.
Even with the reprieve on the worst of the tariffs, the average rate appears to still be at least in the teens. That’s far higher than many businesses can handle.
It’s too early to say if this is the beginning of the end of the U.S. dollar’s global dominance. I was working at an investment firm in London in the 2000s when people were also keen to proclaim the end of King Dollar. Then, the 2008 financial crisis hit, and investors flooded back into dollars and U.S. bonds. Back then, the perception was that the United States was the strongest economy in the world and the most resilient. That proved to be true all the way through covid. But Trump is testing that thesis again, and investors have even more options now than in 2008.
It’s striking how unprepared the White House was for this outcome. As recently as Sunday, Treasury Secretary Scott Bessent was celebrating how low the yield on the 10-year Treasury had fallen and predicting this could spur a revival of the housing market as mortgage rates became cheap again.
By Wednesday, Bessent was forced to go on Fox Business to reassure people around the world that this won’t turn into a crisis. “I believe that there is nothing systemic about this, I think that it is an uncomfortable but normal deleveraging that’s going on in the bond market,” he said.
Trump has backed down for now. But this probably won’t be the last time something unexpected breaks because of the tariffs.