What just happened in US bond markets that spooked Trump into pausing tariffs

120193422What is the US Treasuries market? US Treasuries are debt securities (bonds) of varying maturities issued by the US Department of the Treasury to finance the US government's operations, including budget deficits. Because the US issues debt in dollars �?the same currency it can print �?it is virtually impossible for it to run out of money to repay investors. It is the most liquid investment because there are $27 trillion worth bonds with $600 billion worth bonds being bought and sold every day. Roughly $7.5 trillion is held by foreign governments like Japan, China and India, and the rest is held by the US Federal Reserves, institutions and other retail investors.Why do US Treasuries matter globally?US Treasury yields serve as a benchmark for global borrowing costs. When they rise, funding becomes more expensive across the board. Investors also use their bond purchases to express confidence in a government's fiscal management. In the 1990s, the then US President Bill Clinton was forced to roll back his plans for economic expansion as bond markets were spooked by overspending and yields rose. The US has long enjoyed a “safe haven�?status, but the tariff shock post April 2 has eroded some of that trust. In the wake of the tariff announcement, borrowing costs for sub-investment grade US firms rose by one percentage point.medium nocaption120196046What has happened since April 2?On April 2, US President Donald Trump declared ‘Liberation Day�?and announced reciprocal tariffs on all trading partners with whom the US had trade deficit and a ‘baseline�?tariff of 10% on others. The move caught global markets off guard. Investors, uncertain about what the tariffs would mean for trade and economic growth, began selling even the safest assets, including Treasuries. By April 7, concerns about a possible US recession were growing. The situation worsened on April 9, when the tariffs officially took effect. That announcement triggered panic in the bond market. Investors rushed to sell Treasuries, causing their prices to drop and their yields to jump. medium120194743Why did yields rise?A bond’s yield is the return an investor earns for holding it. It is calculated by dividing the annual interest payment on a bond by its price. When that price falls, yield rises. The converse also holds true. Typically, when interest rates rise �?or are expected to �?bond prices fall. One possible impact of Trump’s tariff was inflation, and therefore expectations of higher interest rates. That’s why, by April 9, the yield on the 10-year Treasury reached its highest level in seven weeks. At the same time, the US dollar fell against other major currencies. This unusual mix �?rising bond yields and a falling dollar �?suggested that confidence in the US economy was starting to crack.The initial selloff reflected a scramble for cash amid market volatility. But the moves were amplified by the unwinding of “basis trades,�?where hedge funds borrow short-term to buy long-term Treasury bonds. This trade assumes falling yields and low volatility. When yields instead rose, leveraged funds rushed to exit, pushing bond prices down further. The 30-year yield rose 53 basis points over three days—its largest such jump since 1982. There were also conspiracy theories about action by the Chinese government.What role is China playing in this crisis?China holds around $760 billion in US Treasuries. There is speculation it could offload some of these holdings in retaliation—though this is considered a “nuclear option�?and unlikely unless tensions escalate. However, China has been diversifying its reserves. Reuters reported that the People’s Bank of China instructed domestic banks to reduce dollar purchases after the yuan dropped 1.3% in April.What does the yield curve mean?The yield curve is a graph that plots the yield (or return) on bonds of different maturities at a single point of time. When investors sell long-term bonds their prices dip and the long-term yield rises, resulting in steepening of the yield curve. On April 9, the gap between 2and 10-year notes increased by 30 basis points in a few hours. A steepening curve typically signals rising inflation expectations or reduced confidence in long-term fiscal stability. It also increases borrowing costs for businesses and govts, affecting everything from corporate loans to mortgages.How did the Federal Reserve respond?Initially, markets had priced in multiple rate cuts for 2025, anticipating a slowdown caused by the trade disruption. But as inflation expectations climbed, the likelihood of cuts diminished. The Fed remained on the sidelines during the bond market turmoil, which further unnerved investors and contributed to rising yields.How has the global bond market reacted?Japan’s 30-year bond yields rose to a 21-year high, prompting an emergency meeting of the central bank, finance ministry and regulators. UK gilts reached their highest yields since 1998. German bonds remained relatively stable, reflecting their haven status within Europe. The divergence in responses shows varying levels of exposure and market confidence across economies.Did the US government respond to the market turmoil?Yes. On April 9, Trump announced a 90-day suspension of tariffs for all countries except China, which faced even higher tariffs. The move was seen as a tactical retreat aimed at calming markets and isolating China. It triggered a rally in US equities. medium nocaption120194623Still, uncertainty persists ahead of a major bond sale on April 10 �?$39 billion in 10-year notes and $23 billion in 30-year bonds. Wells Fargo cautioned that weak foreign demand and retreating domestic buyers may make for a difficult auction.What does this mean going forward?The turbulence in the Treasury market has raised concerns about the sustainability of US debt and the global appetite for it. A key pillar of the financial system �?faith in US fiscal discipline �?is under pressure. If that trust continues to erode, the world’s most important bond market may become more volatile, and more expensive to finance. 120193521What happens when your FD goes to market?Suppose a fixed deposit you hold in a bank starts getting traded (bought and sold) in the market �?bond market. Why would anybody buy your FD? And at what price?The answer to both questions lies in interest rate.Let’s assume interest rate on your FD is 6%. One month after you invested in FD, interest rates on similar FDs have fallen to 5.5%. Your FD is more valuable than current FDs, because of the 0.5% higher interest rate it will yield when it matures. There may be investors who will pay you higher than your FD amount to buy it from you.Alternatively, if FD rates rise, the value of your FD to a potential buyer will fall and you won’t be able to sell it unless you reduce the price to a level lower than what your investment was.Interest rates aren’t the only factor affecting your bond prices. Inflation rate, by affecting interest rate, also matters. Higher inflation leads to higher interest rates and vice versa.It was the fear of higher inflation �?caused by higher tariff �?that started creating turbulence in the US bond market. Higher prices would mean higher interest rate on bonds, which make old bond with lower interest rates less attractive, and their prices fall.Credit rating also influences bond prices. If credit raters assess that the country or company issuing bonds won’t be able to repay investors on maturity, it will downgrade the bond rating, causing a fall in its price.Where does yield come into the picture?Yield is interest rate divided by price. It changes as price changes.Normally, interest rate on short maturity bonds is lower than rates on medium or long maturity bonds. This is depicted as what is called ‘normal yield curve�?that is upward sloping in shape and flattening at the top.medium nocaption120196075When interest rates on short and long term bonds are similar, we get ‘flat yield curve.�?This happens during periods of uncertainty when investors are unsure of medium and long-term prospects.When demand for short term bonds exceeds that of medium and long term bonds, we get ‘inverted yield curve�? This usually happens when investors are not just uncertain but negative about the long term and are flocking to short term bonds. Such a yield curve is often a predictor of recession.Are bonds, treasury bills and gilts the same?Bonds are classified based on their tenure and issuer. When issued by businesses, they are typically called corporate bonds or debentures. When issued by govts, they are referred to as Treasury bills or gilts. Commercial paper and notes are terms used for short-term debt instruments.