Donald Trump's tariff war shocked the stock market and raised fears about the US and European recession. But neither of the factors seemed to motivate the president's sudden Volte face when he suspended most of the border tax on the 90-day “liberation day”;
What is a bond?
A bond is a certificate that confirms that the owner lends money to a particular borrower and is repaid at a fixed fee, usually at a fixed rate. Known as fixed income securities, they appeal to investors who want a stable return.
Companies issue bonds to borrow money, and governments likewise issue bonds to pay for investments and other expenditures. British government bonds are called gold leaf, and US government bonds are known as the Treasury Department and are traditionally considered safe havens as they are guaranteed by the world's largest economy. They are issued on different maturities if two-year, 10-year, 30-year bonds are common and must be fully rewarded.
How are they traded?
Bonds can be bought and sold like stocks in the secondary market (exchange), but unlike stocks, they guarantee annual revenue. The bond market is the world's largest stock exchange, worth almost 130 tons (99 tons), with the US market accounting for around 40% of debt worldwide.
Government bonds are usually sold to financial institutions within the auction and can then be resold to the secondary market to a greater or lesser extent than face value.
What is bond yield?
Bond yields represent the amount that an investor receives to own a debt as a percentage of his current price. When bond prices fall, profits rise. Yields are commonly referred to as interest rates or borrowing costs to the issuer.
Increased yields suggest that it reduces the appetite for ownership of debt among investors. This can be influenced by a variety of factors, including the issuer's ability to pay back. In the case of the government, this is centered around the country's economic and fiscal outlook.
Inflation expectations also have a major impact. This is because inflation weakens the future value of the money received because it owns debt. This means investors can demand higher yields to compensate for risk.
And there is a drain into the wider economy as other financial products such as mortgages are priced from yields.
What did Trump's tariffs do on bonds?
At first, the US president thought his tariff plans would work. The expected stock market will react badly to tariffs and the dollar will fall.
However, Trump was convinced that the bond market would remain calm as he promised to pay the tax cuts at the end of the year with revenue from tariffs. This means that the US government could limit the number of problematic bonds, synchronize supply and demand, and place caps on government-wide debt levels.
However, the tariff war has prompted fear of a US economic downturn, and is risky to lend it to the US. There are concerns that the US will be trapped in Titanic's struggle with China, which will damage both economies for a long time and drag global growth.
In response, investors are selling large quantities of US bonds, increasing their value and yields, making future government debt more expensive.
Where did this leave Trump?
The White House was scared that paying high interest rates on national debt would increase the government's annual spending deficit, putting pressure on already growing budgets, and increasing the overall debt mountain.
Worse, the US Treasury's $2.9 billion market is the foundation of the global financial system, with big sales potentially putting pressure on other parts of the financial system, forcing banks and other institutions to default, causing a wider financial crisis.
Has the situation eased?
The bond market began to settle after the US president said he would suspend punitive tariffs in all countries other than China for 90 days. However, the effective interest rate on 10-year financial obligations on Friday was 4.52%, compared to 3.99% on April 4th, and the yield remains high.
Is this a Trump Liz Truss moment?
The British Prime Minister for 49 Days was overthrown by her own skirmish on the bond market. That verdict was forced to send yields on British Guilt rockets, increasing borrowing rates to mortgage companies and destroying the truss premier as the bond value fell like stone.
Trump has more resources, but he faces similar concerns about the ripple effect. If his policy drives inflation as expected, and some analysts forecast a 4.5% rate by next year, it could alienate the core Republican vote that brought him a promise to cut food prices surges. Voters could view tariffs as taxes on mortgages if the bank began claiming more on mortgages against the background of higher yields and decreasing popularity at his base.
