Less than half an hour before the opening bell on Friday, April 4, President Donald Trump shared a video claiming that the single-largest decline in the New York Stock Exchange since March 2020 was not a blunder but rather the very basis of the president’s double-digit, universal tariff regime.
“So, why is he doing this?” asks an anonymous TikTok user. “To push cash into Treasurys, which forces the Fed to slash interest rates in May, and those lower rates give the Fed the ability to refinance trillions of debt very inexpensively.”
Markets would go on to bleed nearly $7 trillion in the two-day trading stretch after Trump’s “Liberation Day” announcement, and even as Elon Musk and Treasury Secretary Scott Bessent quietly lobbied Trump to reverse course over the weekend and entertain free trade deals from allies, Trump dug in, letting the two true tariff believers, senior counselor Peter Navarro and Commerce Secretary Howard Lutnick, swear that the tariffs were no mere starting point for negotiations. Even after the carnage of the weekend’s futures rout, Trump made clear the tariffs were here to stay.
Until they weren’t. Personal pleas from his biggest billionaire backers did not sway Trump, nor did panic from his congressional allies. While equities continued to collapse, they didn’t collapse any faster than in the immediate aftermath of Trump’s initial announcement. In the end, Trump blinked in the face of the bond market going bust, the exact opposite of the outcome Trump’s most terminally online defenders claimed would happen.
Although Bessent, who has made bringing down bond yields the obsession of his agenda, would later claim the bond market didn’t force Trump’s hand, Trump conceded that Treasury investors got too “yippy” for his tolerance.
But they weren’t “afraid,” as Trump asserted. Rather, Bessent made a trillion-dollar bet on the bond markets, and in the long run, it probably paid off, saving Trump’s presidency from his worst protectionist instincts.
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Trump is far from the first president beholden to the brute force of the bond market. After the “great bond massacre” of 1994 forced the Federal Reserve to hike interest rates and President Bill Clinton to reduce the deficit, James Carville quipped that he used to think he would want to be reincarnated as the president or the pope.
“But now I would like to come back as the bond market,” Carville said. “You can intimidate everybody.”
Trump, who presided over a solid and stable bond market during his first term, had little reason to renew his consideration for Treasurys in his second, but Bessent knew differently.
Despite inheriting a rock-solid bond market from Trump, Janet Yellen, Bessent’s predecessor, failed to anticipate that then-President Joe Biden’s multitrillion-dollar excess spending spree would trigger the worst inflationary crisis in 40 years and bring the previous decade’s experiment of zero-interest rate policy to a permanent end. Consequently, the treasury secretary made a disastrous gamble, doubling the share of government borrowing financed by short-term securities to nearly a third of our national debt. Of the nearly $29 trillion national debt held by the public, 98% is held in marketable Treasury securities. Of this $28 trillion, virtually all of our outstanding national debt, 33% will mature in the next year.
Half a decade ago, the average interest rate on this lion’s share of federal borrowing was 2.213%. A year ago, it was 3.277%, and as of last month, it crept up to 3.347%. Short-term Treasury bills, which once offered the cheapest borrowing rates for Uncle Sam until the Fed hiked interest rates in response to Bidenomics, now have the persistently highest yields of government securities. The great hope of maintaining our +6% deficit-to-GDP ratio hinged on longer-term Treasury notes and bonds. After all, at the peak of the pandemic, the 10-year yield plunged to just half a percentage point. While other nations like Japan and Germany that had temporarily engineered negative bond yields did so through their central banks and governments manipulating monetary policy beyond recognition, the 10-year yield’s collapse ever so slightly preceded the Fed’s COVID response. In other words, the United States hadn’t just achieved the lowest organic long-term borrowing costs in its history — it had achieved the lowest organic long-term borrowing costs in the history of humankind.
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But bond investors haven’t been so sanguine, and the Yellen Treasury played fast and loose with the rules. When Congress suspended the debt ceiling in 2023, Yellen flooded the market with short-term Treasury bills to finance the interim, and Treasury issuance increased by 28.5% from 2023 to 2024. Bessent entered his post with two fateful faux pas to reconcile: the sheer amount of maturing debt and the higher yield environment Yellen had encouraged by flooding the bond market with supply. Hence, Bessent has made the 10-year yield his lodestar based on the sheer math of the bill he’d like to minimize before taxpayers have to pay.
Let’s say that the $9.35 trillion that’s maturing in the next 12 months gets refinanced at the current average of 3.347%. The annual cost just to finance this debt would be $313 billion, or nearly as much as we spent on our entire Veterans Affairs budget during the last fiscal year.
But what if bond markets returned just to the borrowing costs allowed a mere five years ago? If the Treasury could refinance this $9.35 trillion at the average rate from five years ago of 2.213%, the annual interest cost would be $207 billion, a full $106 billion less than at today’s average rate. For reference, Musk anticipates that the total savings accrued by his Department of Government Efficiency will amount to just $150 billion across fiscal 2026.
As the New York Times has reported, Trump’s experience as a businessman means he conceptualizes the implications of routs in the bond market easily, and Bessent, rather than criticize a sweeping tariff regime that he has little ideological allegiance to, set up the stability 10-year yield as the benchmark for his commentary on the tariffs.
The White House likely bet that whatever loss in annual federal revenue from capital gains taxation, usually less than 10% of individual income tax revenue, would be more than made up for by a 100-basis point drop in the average interest rate levied on maturing federal debt. But once it seemed like the Navarro faction had won out and that Trump wasn’t interested in entertaining the free trade deals Bessent had teased, the bond markets went bust.
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In part, Team Trump can blame the fastest three-day rise in Treasury yields since 2001 on recalcitrance from foreign investors, including Chinese investors who surely dumped American bonds at the behest of Beijing. But much of the panic was organic. The U.S. government can usually rely on Treasurys’ status as the global haven for investments precisely because of globalization. When American equities are facing a downturn due to a pandemic or a train wreck of over-leveraged banks, you can bet that the rest of the world’s major stock exchanges and bond markets are suffering similarly. But in a crisis manufactured by one nation’s executive fiat, other nations’ bonds remained attractive even as hedge funds that relied on “basis swap” trades between traditional Treasurys and fixed-rate Treasury Inflation-Protected Securities.
But the greater motivation behind the 10-year’s rapid boom at the end of last week and then the extraordinary bust at the start of this one was more philosophical. Simply, the autarkic worldview of Navarro and company is antithetical to the very reason why U.S. Treasurys have become the haven of global investments.
As I explain in this week’s Washington Examiner magazine, the trade deficit doesn’t exist in a vacuum. The balance of a nation’s imports and exports, otherwise known as a current account, exists on one side of the ledger. On the opposite sits the capital and financial account, or the balance of assets ranging from stocks and bonds to foreign direct investment. Because the current account and the capital and financial account are supposed to even out to zero, our vast trade deficit necessitates an extraordinary capital account surplus. When American consumers purchase foreign goods and services in U.S. dollars, foreigners either use those dollars as mediums of exchange, further bolstering the greenback’s status as the world’s reserve currency, or invest them, often in U.S. Treasurys. When the U.S. first began to maintain consistent trade deficits in the 1970s, foreigners held just 5% of the U.S. government’s debt. By the end of 2023, that figure was 29%, roughly half of whom were private investors and the other half foreign governments.
The U.S. Treasury’s status as the world’s haven for investments is thus self-perpetuating. Because bond yields and bond values are inverse, the greater the demand for American bonds, the lower their yield or the lower the borrowing cost borne by Uncle Sam.
It took a few days for the message to sink in, but Council of Economic Advisers Chairman Steve Miran made sure global bond investors got the point during a speech at the start of the week.
“While it is true that demand for dollars has kept our borrowing rates low, it has also kept currency markets distorted,” Miran said. “Others may buy our assets to manipulate their own currency to keep their exports cheap. In doing so, they end up pumping so much money into the U.S. economy that it fuels economic vulnerabilities and crises.”
Miran’s suggestions to sacrifice our status as the chief beneficiaries of the U.S. dollar’s reserve status included “accept[ing] tariffs on their exports to the United States without retaliation” and “simply writ[ing] checks to the Treasury that help us finance global public goods.”
Bond investors heard loud and clear and, ultimately, responded accordingly.
DID CHATGPT WRITE US TRADE POLICY
Bessent’s single-minded focus on the 10-year, his credibility with Trump, and Trump’s love for the art of the deal won out. At long last, Navarro and Lutnick have been reportedly iced out of the inner circle of Trump’s decision-making and already, Bessent is cautiously broadcasting his progress with international trade delegations.
The treasury secretary is correct that his No. 1 job is to enable the cheapest possible financing of our gargantuan and growing federal debt, and because he understood that, he was able to shepherd Trump away from the abyss.
