No. of Recommendations: 24
Bond yields were the ‘pain point’ that finally got him to pause tariffs
Which is (yet another) reason why it's so counterproductive to have people that don't really understand trade economics drafting your trade policy.
This is not an unexpected outcome if you do what Trump was trying to do. The bond markets and international trade flows are related. Because international currency flows have to balance, as a practical matter any time you have a trade deficit, you also have an "investment surplus." The dollars that flow out to other countries through purchases of goods and services have to be matched by dollars flowing back in through purchase of investments.
Indeed, part of the reason we have a trade deficit is because the U.S. is such an amazing place to invest money, and because U.S. Treasuries are seen as such a safe investment. A rules-based, stable, economic powerhouse like the U.S. is a great place to place money. In essence, the U.S. is extremely efficient at creating desirable investment products, which we then export.
Anyway, the upshot of all of this is that if you introduce a massive "every country on earth" exogenous shock to imports (ie. the beautiful tariffs), you're going to put downward pressure on bond prices. If every country on earth starts exporting less to the U.S., then every country on earth is going to start ending up with fewer surplus dollars (other things being equal) - and since one of the main things those countries do with surplus dollars is buy U.S. bonds, that's going to drive down prices and drive up yields.
Which is why it will be fascinating to see if Trump can actually get anything material out of the supposed flurry of bilateral trade negotiations over the next 90 days. Because our largest trading partners (China, Europe, Mexico, and Canada) weren't on that "fly-in" list, and now they all know that Trump can't withstand the 'pain point' that comes with a massive restructuring of global trade flows. So now that Trump has revealed himself to not have as strong of cards as he (or Navarro) were bluffing at, there's a very clear path for them to push Trump off his position. The bond markets know that high tariffs = fewer foreign purchases of bonds going forwards, so Trump probably isn't going to be willing to land on super-high tariffs for 50% or so of U.S. imports; and now the countries we're negotiating with know that, too.
Trump has a lot of experience negotiating deals where he completely dominates the other party; we're about to see how he does when he has to handle a negotiation where that's not the case.
