Trump’s Tariff Reversal Driven by Bond Market Panic, Not Stock Decline

In contrast to his initial term, President Trump appeared disconcerted to the recent chaos in the equity market this time around. Even when there was a week-long selloff, which some analysts said, took away $4 trillion in market value from investors’ hands, there was no immediate shift in the White House’s aggressive trade posture. But behind the scenes, a more pressing concern was brewing:  the sharp deterioration in the bond market. It was not falling stock prices but rising yields and a broad selloff in US government debt that forced a change in the Trump administration’s tone.

Bond Selloff Rings Alarm Bells

Bonds issued by the US government are usually thought of as safe investments that people run to in times of trouble. But that confidence was shaken when the yields on US Treasury bonds rocketed up from 3.9 percent to 4.5 percent in just a few days, the highest they've been since February. And most of the pressure to push prices down and yields up was coming from the foreign holders of US bonds,  especially in Japan and China, who were dumping the debt out of an increasingly panicked sense of what the future holds. The US has over $35 trillion in bonds out there, and these rising yields mean it's getting to be far more pricey to issue new ones and to roll over old ones. That has direct implications for necessary federal spending programs like Social Security and Medicaid.

A Key Voice Emerges Inside the White House

What also altered the scenario was the return of sway for Treasury Secretary Scott Bessent. A seasoned figure from Wall Street, Bessent had been pushed to the  side along with more hawkish advisers in the past few weeks. But with  investor confidence being shaken and the bond market flashing warning signs,  Bessent's arguments have gained sway. Given the recent reports, it seems that  Bessent was instrumental in securing a 90-day timeout on new tariffs, which  is something that obviously Trump signed off on. Bessent's approach seems to  have won out over the more aggressive advice of commerce secretary Howard  Lutnick and senior counsel Peter Navarro. His public statement marking this hiatus was a rare moment of moderation from within an otherwise combative administration.

Corporate Credit Markets Face the Ripple Effect

The bond selloff has other implications too, especially for companies that are trying to raise money in a now-very-challenging credit environment. With corporate credit spreads widening and stock valuations tumbling in response to rising rates, companies are facing a more adverse setting in which to raise funds. 

Here’s another way to look at it: The last time investors were demanding this kind of premium between US junk-rated and Euro junk-rated bonds, back in 2008, the US economy was in the midst of a slow-motion meltdown.