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Another key recession indicator is rearing its head as President Donald Trump’s administration enacts reciprocal tariffs on large swaths of goods imported into the United States. On Wednesday morning, the price of U.S. Treasury bonds took a nosedive, while yields spiked — a sign that bond holders are dumping their debt and attempting to lower any risk in their books.
Trump isn’t bothered.
“BE COOL!” the president wrote on Truth Social Wednesday morning. “Everything is going to work out well. The USA will be bigger and better than ever before!”
“THIS IS A GREAT TIME TO BUY!!!” he added in a subsequent post.
But financial markets and investors are struggling to keep a level head as Trump seems hell bent on destabilizing the global economy, despite his repeated assurances that all will be well and Americans will soon be richer than ever.
Since Trump’s tariff announcement last week, markets — both national and international — have whipsawed through record breaking daily highs and lows — with the Dow Jones dropping 10 percent in the last month alone. In the first two months of his presidency, Trump has already managed to wipe out any post-election investor enthusiasm, and markets are now teetering on the brink of a historic collapse as his tariffs take effect.Goldman Sachs and JP Morgan have been jacking up their odds of a recessions since Trump’s tariff announcement last week.
One of the only things keeping markets from a full blown collapse has been the White House’s claim that over 70 countries have approached the administration hoping to negotiate deals and exemptions from Trump’s tariff bonanza. The president may be blowing them off, though. According to a Wednesday report from Politico, several nations have expressed frustration with the White House’s lack of real engagement on trade negotiations. “I’m not sure … how receptive the Commerce Department, the [U.S. trade representative], is in getting our Cabinet secretaries to meet with counterparts. Many of us have already written to them asking for meetings,” one Philippine official told Politico, adding that they and other countries “are all waiting for the reply.”
“Even if you have a meeting, apart from a nice tweet, you don’t get anything,” another diplomat said.
At an annual National Republican Congressional Committee dinner on Tuesday night, Trump all but admitted that crafting deals with interested trade partners is not his primary focus at the moment.
“These countries are calling us up, kissing my ass — they are — they are dying to make a deal.
‘Please, please make a deal. I’ll do anything. I’ll do anything, sir,’” Trump said during his speech at the event.
“We don’t necessarily want to make a deal with them. We’re happy the way we are taking our $2 billion a day, but they want to make a deal with us. I know what the hell I’m doing. I know what I’m doing, and you know what I’m doing, too. That’s why you voted for me,” he added.
The instability in the bond market is also raising red flags for economists and analysts who say the sell-offs may be a sign of an implosion in the treasuries so-called “basis trade.” To avoid a full economic lecture, basis trading is an investment strategy in which an investor buys an asset or commodity, and then sells a related derivative of that commodity in order to take advantage of the market difference between the price of the two.
In the context of treasury bonds, large hedge funds have for years now been purchasing bonds as safe collateral for potentially risky investments. At the same time, they will sell futures contracts on bonds in order to collect on the difference — the basis. It sounds fine in theory, but it’s contingent upon a slow and stable market, and any large swing can be devastating. As Bloomberg’s Matt Levine wrote in 2023: “The obvious objection is that if you have $550 billion of Treasuries backed by $10 billion of your own money, and the value of Treasuries drops by 2%, then all of your money is gone, you have to dump Treasuries, everyone else is dumping them at the same time and there is a crisis. This is an exaggeration, because if the value of Treasuries drops by 2% then probably you made 2% on your futures and you’re more or less fine, but still there is not a ton of margin for error.”
While a full blown Treasuries market collapse has yet to manifest, signs that the basis trade could cause a domino effect collapse akin to the 2008 financial crisis have reared their head before. In 2020, when the Covid pandemic caused widespread market instability, hedge funds took a beating after major international banks and other investors dumped their Treasury bonds in order to access liquid funds. International investors are no doubt spooked, and the Treasuries market — a pillar of the global economic system — is looking a little too shaky for comfort.
It doesn’t help that on Wednesday morning, China leveled another round of retaliatory tariffs against the United States, bumping up their penalties on goods imported from the U.S. from 34 to 84 percent, compared to the 104 percent Trump is charging on Chinese imports.
When asked how he felt about the escalating tariff war between the U.S. and China, Treasury Secretary Scott Bessent told Fox News that “they can raise the tariffs, but so what?”
Bessent may not mind a trade war, but the collapse of the bond market would fall right on his desk.
