Bond investors went ballistic when President Donald Trump’s tariffs took effect this week. Consider it a preview for what’s in store.
The sharp sell-off in government debt securities that underpin the global financial system pushed Trump to pause for 90 days his plans to slap gargantuan tariffs on dozens of trading partners. “I was watching the bond market,” he explained. “That bond market is very tricky.”
It won’t be the last time the president’s sensitivity to the market will be tested as his inner circle navigates dozens of bilateral negotiations and ratchets up a trade war with China. And should bond investors continue to balk at what many see as Trump’s unpredictable approach, he’s likely to come under intense pressure to resolve the conflicts.
“The market now believes that trade policy can change from minute to minute,” said Chip Hughey, a managing director of fixed income securities at Truist. “I don’t think the volatility is going anywhere.”
Investors often treat government bonds as a haven during times of market stress. Now, the opposite has occurred. Hedge funds and other investors have dumped Treasury securities even as stocks plunged, pushing up yields that are used to benchmark everything from mortgage rates to corporate loans.
The 90-day pause has done little to quell the market’s fears. Economists are cautioning that stagflation — periods of weak growth and surging prices — is exceedingly likely. If trade policy uncertainty continues to rattle bond investors and drives up borrowing costs, it would saddle Trump with a lethal mix of high interest rates, elevated inflation and slow or even negative economic growth. That would threaten his ability to forge ahead with his broader policy agenda and pose a severe risk to Republicans in the 2026 midterms.
Even with the pause, levies on imports are now five to 10 times higher than they were when Trump took office. The tariffs imposed by the president have exceeded even the “mega-size” scenarios envisioned by economists at the Federal Reserve Bank of Chicago prior to Trump’s April 2 “Liberation Day” announcement, Chicago Fed President Austan Goolsbee said at an Economic Club of New York event Thursday.
Absent a clear road map on tariffs, Goolsbee said he isn’t anticipating boom times for bonds anytime soon.
“There’s a lot of selling pressure in an environment where it’s uncertain whether we’re going to enact this largest tariff in 100 years — and it might be bigger than that,” he told reporters. Given the large issuance of government debt in recent years, “I could see there being a lot of continued uncertainty.”
Deeper questions could be in store in the coming weeks, such as the stability of the U.S. financial system in the face of sustained chaos, though so far it’s held up well, with no high-profile blowups. Auctions of 10- and 30-year Treasury securities went smoothly this week, allaying fears that demand had evaporated.
There’s little clarity right now on the extent to which bond market jitters are driven by general market turmoil — some investors are selling Treasuries because they need cash — or whether it might signal something more ominous, such as less confidence in U.S. assets as Trump upends the global economic order.
“The amount of Treasury debt that is in existence, plus the amount that will likely be produced by large deficits, is very large relative to the demand. If there weren’t the geopolitical confrontations, this would be a big problem — unless they cut the deficit to about 3 percent of GDP, which is not going to happen,” Ray Dalio, the founder of the hedge fund giant Bridgewater Associates, said in an email. (The deficit is now at more than 6 percent of GDP.)
But “with the geopolitical circumstances raising concerns among large international investors that they might not get the full value of their Treasury bonds, this is an even bigger problem,” he said.
Julia Coronado, founder of MacroPolicy Perspectives, said institutions are diversifying away from dollar-based assets. Some investors are viewing it as a temporary move, as policies remain in flux, she said, while others are reassessing their long-term investment strategy toward the U.S.
She warned that the bond market might no longer be as accommodating of U.S. tax and spending decisions beyond tariffs.
“Yields are not falling even though people are pricing in a recession,” she said. “They’re pushing this very undisciplined budget, and the market’s not taking it well.”
“Trust is going down,” she added. “You have to pay for those decisions.”