Trump 'yields' to bond market sell-off threat?
US President Donald Trump, with his bold and aggressive reciprocal tariff announcements, has managed to tie himself in knots. Now, in an apparent effort to undo the damage, he’s opted to defer the tariffs by 90 days. Predictably, he's framing the move as a "brave" gesture—claiming global leaders are lining up to negotiate with him, and thus justifying his decision to delay the tariffs.
In another visible climbdown, the Trump administration has also exempted imports of electronic items from the tariff list.
However, the reality is far more complex. While several theories are circulating to explain Trump’s sudden change of heart, the most compelling points to fears of a massive sell-off of US Treasury bonds by foreign investors.
Bonds That Matter
During the week, US Treasury bond yields—comparable to Indian government bonds—saw their sharpest rise since 2001. The 10-year yield climbed to 4.592% on Friday, the highest since February 13, and closed at 4.49%. It marked a weekly increase of 60 basis points—the biggest since 2001. Yields rise when bond prices fall.
What’s alarming is that bond yields surged even as equity markets tumbled—a rare occurrence in normal times. Typically, bond prices and stock prices move in opposite directions. But in periods of deep economic uncertainty, both can decline simultaneously. US Treasury bonds are traditionally viewed as safe havens during global turmoil, but the recent sell-off has challenged that long-standing belief.
“The pause on the reciprocal tax wasn’t a strategic recalibration—it was a bond market intervention,” says Utkarsh Sinha, Managing Director at Bexley Advisors, a boutique investment banking firm.
“Historically, equity and bond markets rarely sell off in tandem. When they do, it’s a red flag. It last happened during episodes of extreme uncertainty—like the 2008 crisis or the height of the pandemic,” he explains.
Higher yields on US Treasuries translate to increased borrowing costs for both corporations and the government. When confidence in US debt wavers and borrowing costs spike, the implications ripple far beyond the realm of trade, says Sinha.
The Sell-Off Threat
Roughly a quarter of the $36 trillion US Treasury market is held by foreign investors. Japanese investors alone hold over $1 trillion in US bonds. But the real concern for the US administration lies with China, which holds around $760 billion worth of Treasuries. With tensions between Washington and Beijing running high, neither side seems willing to back down.
In retaliation to US tariffs, China has hiked tariffs on American imports to 125%, even as the White House threatens to raise tariffs on Chinese goods to 145%. While Trump has offered a 90-day reprieve to several nations, he has not extended the same to China. In 2024, China exported $440 billion worth of goods to the US, maintaining a trade surplus of $295 billion.
The prospect of China dumping US Treasuries in favor of gold or other currencies has unnerved Washington. Still, Trump insists, “The bond market’s going good. It had a little moment, but I solved that problem very quickly.”
Namrata Mittal, an economist with SBI Mutual Fund, underscores the scale of the US government’s financing challenge. “The US plans to issue $2 trillion in new debt this year, and has $8 trillion worth of maturing debt to roll over—on top of its existing interest obligations,” she says.
“Restoring confidence in US Treasuries may be essential. Perhaps that’s one reason for delaying the tariffs—a tactical move to buy time,” Mittal adds.