President Donald Trump‘s introduction of wide-ranging tariffs on foreign trade partners has caused yields on long-dated, 10-year, and longer United States Treasurys to surge. At the same time, expectations about economic growth have plummeted into far more negative territory.
Market participants are wondering what is going on. Usually, when investors believe economic growth is slowing, they buy longer-dated Treasurys because slower economic growth puts downward pressure on inflation. Lower inflation means investors accept lower Treasury yields. The difference between the yield on the 10-year Treasury, the benchmark instrument of the U.S. financial system, and inflation is the key valuation metric for purchasing Treasurys.
As inflation falls, so too do Treasury yields. But since Trump’s “Liberation Day” announcement, while inflation data from the federal government has shown lower inflation, Treasury yields have gone up, not down. This dynamic, lower inflation but higher yields, has spooked financial markets: Treasurys, equities, and currencies.
Many put the blame for rising Treasury yields on a complex hedge fund trade called “the basis trade,” where hedge fund managers try to take advantage of small differences between actual yields and yields on futures contracts. But data from JP Morgan disproves that explanation.
Another boogeyman is China. Some speculate that China is selling Treasurys in order to put pressure on the White House to stop tit-for-tat tariffs. But this, too, is not a plausible explanation as aggressive selling of Treasurys by China would have roiled financial markets and caused financial losses to the government of China.
The most plausible explanation for the sell-off in Treasurys is that international investors are losing confidence in the U.S. economy, the U.S. financial system, and Trump’s policies. For international investors and an increasing number of domestic investors, the idea of American “economic exceptionalism” is over. Trump’s tariffs are upending the global economic world, which has served the nation well since the end of World War II. Moreover, esteemed economists uniformly agree that Trump’s tariffs will harm the U.S. economy. His tariffs will lower long-run economic growth. His tariffs are an explicit tax on household consumption that drives the domestic economy.
Investors are also losing confidence that U.S. Treasurys and the U.S. dollar are the safe haven assets of the global economy. One of Trump’s closest economic advisers has suggested that the U.S. force sovereign nations to swap Treasurys for very long-dated, 100-year Treasurys, which would be a clear case of economic extortion. This is idiotic as it would mean that the U.S. would, in effect, default.
AMY CONEY BARRETT IS NOT BEHOLDEN TO TRUMP
Top line: Trump’s actions have caused investors to want out of the U.S. economy. They don’t trust Trump and his advisers. They are selling U.S. equities. They are selling U.S. Treasurys. They are selling U.S. dollars. International investors don’t want any part of an economy where the person in charge is perceived to be deliberately sabotaging both the domestic economy and the global economy.
Trump can change course, or he can accept the inevitability of continuing negative economic ramifications from his policies.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected].
