Did the bond market really humble Donald Trump? Well, the the story doesn't wash.

Within hours of 'Liberation Day' day reciprocal tariffs going into effect on April 9, President Trump announced a 90-day pause on reciprocal tariffs on all countries except China. The baseline tariff of 10 per cent would stay as would the tariff of 25 per cent on aluminium, steel and autos.

Market analysts celebrated Trump's supposed retreat as a triumph of the bond market. They said that there was a bond market sell-off prompted by fears of stagflation brought on by Trump's tariffs. Bond market yields started rising. This raised concerns about a possible financial meltdown. 

How would such a meltdown happen? Well, one reason would be that government bonds are pledged as collateral in various trades. When bond prices fall, margin calls go up. To fund the margins, traders have to stump up cash. They would do so by selling government bonds which are the most liquid securities one can have. That would cause a further fall in bond prices, more margin calls.... a vicious spiral would emerge.

There are various other trades that could lead to the same outcome. The Economist explains these very well. 

Plausible as the explanation seems, there are serious flaws in it:

i.  Government bond yields can rise any time, sometimes very sharply. Does that mean that every time that happens, we would have a financial crisis because government bonds are pledged as collateral in trades? 

ii. Trump announced his pause on April 9. Yields did not fall immediately thereafter. The yields on on 10 year US government bonds actually rose from 4.39 per cent on April 9 to 4.49 per cent on April 11. They have since fallen to 4.33 per cent. The pause is not a material change in the tariff situation, by any stretch of imagination. Apart from the tariffs that remain in place, the tariff war between the two principal economies, US and China, has escalated to a point where Trump has announced a 245 per cent on Chinese imports! I cannot see how the 90-day pause can be construed as a win for the bond market.

iii. There had been a much bigger jump in 10-year bond yields earlier. The 10-year yield jumped from 4.18 per cent on 4.18 per cent  on December 5, 2024 before the results of the presidential elections were known to 4.8 per cent on January 13, 2025, ten days before Trump was sworn in as President. It was a much bigger jump that what we saw around Lberation Day- from 3.99 per cent on April 4 to 4.39 per cent on April 9. We should have had a financial meltdown in January if the story about rising bond yields is true.

Trump seems to have sensed that there was no tearing hurry for him to take on all economies at one go. Better to focus on the main problem, China. If that brought comfort to the markets and calmed things down for a while, it was welcome. There doesn't seem to anything more to the pause. 

The bond market story is a convenient stick with which to beat Trump- it serves the purpose of showing up Trump as an ignoramus who understands little about how markets work. Well, that's a pretty stupid assumption to make about a billionaire businessman.