Treasury Yields Running Amok Amidst Tariff Madness

The Trump administration wanted to get bond yields down, but yields have skyrocketed more than in over four decades. Investors are jittery about holding US debt in response to Trump’s trade wars and, possibly, the idea of a president who is pushing a Strategic Bitcoin Reserve in what would amount to a bid against the US dollar. 

Volatility signals a rattled market. The 10-year yield surged more than it has since 1982, signalling that holders of long-term US debt are dumping their positions. The higher yields go, the more you’re paid to hold the debt, because markets perceive a higher level of risk. Once seen as the ultimate stable milquetoast investment, the yield surge from a crash to 3.9% to over 4.5% in recent days has caused investors to question holding long-term US debt.

10-Year Treasury Yields, 1-Month

In fact, Trumpenomic chaos has cast shadow of doubt on the US dollar itself. That sentiment is being reflected in the US dollar index, which was boosted significantly after Trump was elected. During the period before Trump took office, currency speculators who thought that a Trump win would boost the dollar placed their bets and pumped the price. Their bets have soured as Trump began introducing and implementing his economic agenda.

DXY 1-Month

The administration’s inability to keep yields in check is raising serious questions about the future of U.S. debt and the broader economy. The catalyst has been Trump’s aggressive tariff strategy, which aims to protect American businesses and boost the long-dead domestic manufacturing sector. Foreign holders, including major players like China and Japan, are reconsidering their positions, fearing that the U.S. is becoming a riskier bet in an increasingly unpredictable trade environment. The Trump administration knows that there is an event horizon for Treasury yields, at which a cascade of debt-selling starts that can’t be stopped. That’s Trump and Co. backtracked on their tariff plans.

But if the Fed doesn’t start QE, the Treasury will do it for them in a desperate bid to keep pushing Treasury yields down. It will buy back its own debt in a mathematically confounding fiscal ouroboros. Though Keynesians will insist that Treasury buybacks aren’t QE, despite being a way to increase liquidity. But buybacks can function as QE by another name, fundamentally still expanding the money supply and fueling inflation through fiscal operations rather than monetary policy.  

If this trend continues, we could be staring down the barrel of a financial crisis that makes the 2008 meltdown look tame.

The Fed may have no choice but to step in with emergency purchases of Treasuries to stabilize the market. QE “worked” during the pandemic and the 2008 crisis by injecting liquidity and keeping borrowing costs low by kicking the can down the road and fueling inflation that would lead to today’s sky-high consumer prices. What’s more, it could further inflate the already staggering U.S. debt, trillions of which will soon need to be serviced. The pressure is on.

The U.S. could face a vicious cycle of rising debt servicing costs, higher inflation, and slower growth—a stagflation scenario that could derail Trump’s economic agenda and alienate his core voter base. The resulting financial crisis could dwarf 2008.

The upside-down bond market isn’t just a thermometer for economic health; it’s a disciplinarian. But the true “safe haven” was never the 10-year bond, which assumes that at any given time, a decade from now, the US will be in good standing to pay its debts. The true safe haven is gold.

Higher bond yields historically correspond with a higher dollar. You have to buy dollars to invest in Treasurys, but the Trump administration’s tariff madness has broken the correlation as investors take a dim view on the value of the currency itself as well as the debt that it’s linked to. The fragility of the US economy is on full display as a full-blown collapse looms. 

We may now be at a crossroads where economic chickens, from past and present, all at once flock home to roost.