Introduction
Donald Trump’s obsession with tariffs remains unyielding, despite pleas from trading partners and the plummeting stock prices of companies like Tesla, Ford, and General Motors. While he can tolerate stock market declines similar to those seen during the worst of the pandemic or the Great Recession, Trump remains vigilant about the state of 10-year Treasury bonds.
Trump vs. Powell: A Turbulent Relationship
Trump once targeted Federal Reserve Chair Jerome Powell, relentlessly criticizing him and even calling for his removal. However, the bond market forced Trump to back down, compelling Powell to clarify that he would complete his term until mid-2026.
The Intimidating Power of the Bond Market
James Carville, a political consultant who coined the phrase “It’s the economy, stupid,” humorously stated, “If I could reincarnate, I’d like to come back as the Bond Market. You can intimidate anyone.” The bond market’s influence has proven significant enough to affect even Trump, who seemingly disregarded his own “Art of the Deal” wisdom when confronted with rising bond market temperatures.
Market Dynamics and Investor Behavior
During this period, large-scale sell-offs of U.S. Treasury bonds by China have intensified the trade war’s financial implications. As the second-largest holder of U.S. debt, China possesses nearly $800 billion in Treasury bonds. Japan, the largest holder with over $1 trillion, has not engaged in massive sell-offs.
Institutional Investors’ Reactions
Institutional investors have shown disapproval of Trump’s tariff tactics and his attempts to influence the Federal Reserve. Ken Griffin, CEO of Citadel, one of the world’s largest investment firms, aptly summarized the situation: “The United States is more than a nation; it’s a global brand… In financial markets, there is no brand that compares to the U.S. dollar and U.S. Treasury bonds. We are putting that brand at risk.”
Implications for the Global Financial System
While the dollar’s hegemony in the global financial system remains secure, Trump’s actions have sparked a credibility crisis in U.S. leadership unlike any seen before. The tumultuous relationship between the White House and the Fed has created fissures in bond markets, weakening the dollar without control. This situation could accelerate a trend where the U.S. loses ground to China in global trade, prompting a shift from dollar-based transactions to yuan.
Key Questions and Answers
- What is the significance of 10-year Treasury bonds in Trump’s trade war? The bond market’s performance has a substantial influence on Trump’s decisions, as it reflects investor confidence and capital flows. When bond yields rise due to tariff-related uncertainties, it signals potential risks for the U.S. economy.
- Why is China selling U.S. Treasury bonds? This action is part of the ongoing trade war between the U.S. and China, shifting from tariffs to financial markets. By selling bonds, China aims to exert pressure on the U.S. and safeguard its own financial interests.
- How are institutional investors reacting to Trump’s tariffs and Fed criticism? Many institutional investors disapprove of Trump’s tariff policies and his attempts to sway the Federal Reserve. This disapproval is reflected in their capital allocation decisions, favoring safer investments like U.S. Treasury bonds.
- Could the dollar lose its status as the dominant global currency? Although unlikely in the near term, Trump’s actions have introduced uncertainties that could gradually erode confidence in the dollar’s dominance, potentially leading to increased use of other currencies like the yuan in international transactions.
