Bond yips

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   By Guest Blogger Ryan Lewenza

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President Trump recently reversed (again) his tariff policies by putting a 90-day pause on his ‘reciprocal’ tariffs. He cited weakness in the bond market as a key reason for this reversal/pause. In response to a reporter on his decision to pause the tariffs he said people “were getting a little bit yippy, a little bit afraid,” and that the pause would calm investors and the bond market.

My boy can get a little ‘yippy’ when he’s on the mound pitching in an important baseball game. What happened in the bond markets was closer to a meltdown. And if he didn’t reverse course, we could have potentially seen a full-blown crisis in the bond markets, which could have had devastating consequences for the markets, the economy, and in our every day lives.

Today let’s review what occurred in the bond market and examine the critical role US Treasuries play in the global markets and economy. So, today’s blog will be a primer on the bond markets, and trust me, what happens in the larger bond markets is more important than the equity markets.

US Treasuries are government bonds that are issued by the US Treasury department to fund government operations. They are backed by the full faith and credit of the US government and are the bedrock of the global financial system.

There are three main types – T-Bills (short term with maturities less than one year), Treasury notes (bonds with maturities of 2 to 10 years) and Treasury bonds (long-term bonds with maturities up to 30 years).

US Treasuries are initially issued in the primary market, and are sold to various investors, pension funds and central banks through an auction process. Every year that the US government runs deficits, which is the difference between revenues (i.e., taxes) and expenses, the US Treasury must issue new bonds to cover the shortfall.

With all the accumulated deficits over the last 250 years since the foundation of the US, total US government debt outstanding sits at a record US$37 trillion. This is broken into debt held by the public which sits at US$29 trillion, and debt held by US intergovernmental agencies ($8 trillion) like the US social security fund.

The Federal Reserve is the US central bank and is responsible for setting short-term interest rates, known as the Fed Funds Rate. Interest rates on longer term maturities like the key 10-year Treasury yield is determined by the market. Investors consider a number of factors including the level of short-term rates, future expectations for inflation and economic growth, and they collectively help set the level of interest rates for long-term bonds.

Below is a chart of the US yield curve, which is the level of interest rate for each US government bond, ranging from the shortest (1 month) to the longest (30 years). So, for example, the current yield on short-term T-bills is 4.4% and 4.8% for a 30-year Treasury bond.

US yield curve

Source: US Department of the Treasury

Now, US government bond yields then dictate the interest rates on all the different bonds, loans and investments that exist including mortgage rates, CDs (US GICs), and corporate bonds. For example, in the US most mortgages are based on a 30-year term, and 30-year mortgage rates are based on the level of interest rates of the 30-year Treasury bond.

As seen in the chart below, there is currently US$77 trillion of debt outstanding in the US, which is broken into state, federal, household and businesses. As US treasury yields change over time, this will impact the level of interest rates on all these different bonds and loans. This is why the yields of these different US treasuries are so important and why stability is key.

Total US nonfinancial debt stands at US$77 trillion

Source: Federal Reserve; Financial Accounts of the US

So, now that we know the size and importance of US treasuries, let’s review what happened in the bond market following Trump’s tariff announcement.

Shortly after Trump announced the tariffs, investors started to get concerned or ‘yippy’ about the impact of these tariffs on the economy and, more broadly, the safety in holding US dollars and Treasuries. Investors were losing faith in the US as a stable trading partner, as the world’s largest superpower, and even the US dollar as the world’s reserve currency.

From the date of Trump’s tariffs announcement (‘Liberation Day’) on April 2nd to April 9th, the day he announced the pause of the tariffs, the S&P 500 declined by over 12% and US Treasury yields surged by over 50 bps in just a few days. Below is a chart showing the US 10-year and 30-year Treasury yields, and you can see the surge in yields over this period. A 50 bps jump in yields in just a few days is extremely rare and captures how spooked investors were over the impact of his tariffs.

While the stock market drop was quite concerning, President Trump seemed unfazed by this and stuck to his guns. He kept stating to “stay cool” and “markets are going to boom, the stock market is going to boom.” But what did spook Trump was the steep drop in US government bond prices and the surge in interest rates.

According to the WSJ and other news outlets, the Treasury Secretary, Scott Bessent flew to Mar-a-Lago on a weekend to warn Trump about the chaos in the US bond markets, and that the bond market was “flashing red”. He advised Trump that he had to change course or risk a major meltdown in the bond markets, which is the lifeblood of the US economy and global financial markets.

US government bond yields surged by over 50 bps

Source: Stockcharts.com, Turner Investments

There were also rumours that China was offloading some of its US Treasury holdings in retaliation to his outrageous tariffs. China currently holds US$770 billion of US Treasuries, which is down from the $1.2 trillion they used to hold, but they still represent the second largest holder of US Treasuries after Japan.

The fear is that China could continue to offload these bonds in retaliation to the tariffs, which could flood the market, pushing US Treasury prices lower and yields higher. I believe this risk is overstated since a meltdown in US Treasury prices would be devastating to the global economy and markets, which could end up causing a deep recession in China. Given the almost symbiotic relationship between these two superpowers, I highly doubt China would take this extreme approach by dumping their US Treasuries.

As I’ve outlined today, the US and entire global system is underpinned by US Treasuries. If it goes, then everything goes. Given this, Trump blinked when he started to see his tariffs negatively weigh on the critical US bond market. Hopefully this is a wakeup call to the negative effects of his tariffs, and that he’ll change course, as he recently did with the 90-day pause.

Trump and officials are saying numerous countries are lining up to make trade deals to address Trump’s concerns and have him reverse course on the tariffs. China is next up, and I really hope they come to the table and start the negotiation process. Clearly, the global economy and financial markets can’t withstand this tariff uncertainty, as evidenced by the recent sell-off in the bond market.

Holders of US Treasuries

Source: Statista

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

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About the picture: “Thanks Garth for all you do,” writes Paul. “My wife and I have been loyal readers for the last 8 years.  This is a picture of Daisy. She is our 4 year old Havenese.  Daisy is fed up with all the talk of Tariffs and wonders what it will do to the cost of kibble and treats. I love the blog and try not to read the comments to often.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/04/19/bond-yips/