There has been a lot in the news about the stock market fluctuations reacting to Trump’s tariffs. But political writers believe it was the large sell-off of bonds that finally persuaded Trump to hold off on the tariffs.
Treasury bonds are how
governments borrow money to cover budget deficits. Bonds are considered the
safest low-risk investments but with correspondingly low interest fixed rates.
President Trump’s on-off announcements about tariffs, and the resulting
economic chaos and fear of a recession, have shaken public confidence in the
American government and economy, causing bond interest rates to increase. Because
the increased risk of not getting paid interest, or not getting their money
back, purchasers of bonds are now paying less for them and demanding a higher
rate of interest. The increase may seem small, moving from about 4% to 4.5% in
the last week (on 10 year bonds), but on trillions of debt it adds up.
As bond interest rises it
pushes up the interest rates on mortgages and other loans. It also increases the
portion of the budget dedicated to servicing the debt, reducing the amount left
for essential services.
A key feature of the
budget that just passed the House is the big tax cut that Trump has promised
all his billionaire campaign donors. That tax cut will add 4 or 5 trillion
dollars to the debt over the next few years which will require selling that
many more bonds. Trump has painted himself into a corner here. He campaigned on
the big tax cut then created a situation where it will be nigh impossible to finance
it.
Thom Hartmann reports that
$8.5 trillion of the $36 trillion US federal debt is owned by foreign
countries: Canada $350b, Japan $1t, EU $1.5-2t, and China $760b. If these
countries were to sell off their shares flooding the market, it would make it
that much harder to find buyers for new bonds.
At the same time as bonds
and stocks are selling off, the American dollar is declining in value compared
with the currencies of its major trading partners. It dropped 0.9 percent in
the last week.
Unlike President Trump, Canada’s
current Prime Minister Mark Carney understands international finance – he was
the Governor of the Bank of Canada and later of the Bank of England – the
equivalent of the American Federal Reserve Board. And unlike Trump, the leaders
of the other countries, if they don’t understand international finance, will
listen to people who do.
Matt Eagan, a portfolio
manager with Loomis, Sayles & Company interviewed for the NYT, put it
succinctly: “Picking fights with major trading partners who also finance
your debt becomes especially risky with a wide fiscal deficit and no credible
plan to rein it in.”
Sources
https://hartmannreport.com/p/saturday-report-41225
https://www.nytimes.com/2025/04/11/business/economy/treasury-bonds-tariffs.html
No comments:
Post a Comment