The Bond Market Is Flashing Red
Normies don’t normally care about the bond market–it's for nerds and professionals–mostly professional nerds. Once in a while, the bond market has a big problem. And then everyone cares.
We’re there again. The Treasury market in early April had bond yields spike quickly in response to the US President’s “Liberation Day’ Tariff agenda.
The bond market is flashing warning signs—and they’re not just about interest rates. They’re about trust. The administration’s aggressive tariff policies are backfiring by reducing the demand for U.S. debt; in a world where we do less trade, less people want to own US assets. By turning trade partners into adversaries, we’ve made our bonds less appealing at the same time as we need the world to keep buying them.
Normies Suddenly Care About the Bond Market
Normally, when people hear "bond market," their eyes glaze over. Isn’t it where retirees park cash for ‘income?’
The bond market is also where governments (and corporations, and banks) borrow huge sums of money. When the U.S. runs a deficit (which we always do), we issue IOUs, Treasury bonds, instead of just printing money.1 Investors buy those bonds which give a stream of interest–its a loan to the government. The biggest buyers of US bonds are banks, foreign governments, investment funds, pension funds and high net worth individuals (aka rich people).
In the US, we are used to taking high confidence as a given. The Federal Reserve’s key interest rate is the main driver of rates throughout the Government bond market. What happens, though, when that trust is eroded–in other words, what happens when the people who normally buy bonds all want less bonds? They sell and don’t show up to buy as much. In this kind of environment, the Fed's power to affect the market via interest rates is reduced, not by the President, but because investors will demand higher rates to account for the increased risk of dollar decline or the US defaulting on its debt.
While the White House states the bond market is ‘beautiful’ and that they are cutting government spending, the reality is total government spending keeps rising and professional investors are taking this as a sign the White House is not dictating to the bond market, but reacting to it.
Normally a stock market decline like we saw would cause a ‘flight to quality’--people pushing their money into ‘safe’ treasury bonds. That action normally pushes rates down. After the questionable April 9 bond auction which saw plenty of interest, but at a higher rate than expected. However, this didn’t happen–rates were pushing upwards (which means prices were dropping and fast).
II. Japan’s “No Thanks” Fallout
This week, Japan refused to play ball. Prime Minister Ishiba was clear: “We do not plan to make big concessions just to reach a deal quickly.” He didn’t just question the economics—he questioned U.S. credibility, pointing to the Trump administration’s reversal of prior auto trade agreements.
In response, Japan’s markets held steady, U.S. stocks dipped and Treasury yields spiked. That contrast matters. It suggests confidence is eroding faster in Washington than in Tokyo. We’re pushing for a deal. But time—and leverage—may not be on our side.
We’re trying to finance over $1.8 trillion in new debt annually, and our key foreign buyers are hesitating. That’s not a technical issue. It’s a credibility crisis in slow motion.
III. Liz Truss Walked So We Might Run… Into a Wall
In 2022, UK Prime Minister Liz Truss unveiled sweeping, unfunded tax cuts. The bond market didn’t blink—it exploded. Yields soared, pension funds buckled, and the Bank of England had to step in to prevent a full-scale meltdown. Truss was out in 44 days, famously outlasted by a head of lettuce livestreamed on a counter.
The U.S. isn’t Britain. We have the global reserve currency, deeper markets, and control over our own debt. But we also have a lot more of that debt—and far more riding on the confidence of foreign lenders.
While not as pronounced as the rise of UK interest rates in 2022, there was a slow, longer term increase in US rates coming into 2025, interestingly this occurred as our fed rate came down. This was not alarming, in and of itself. In some ways it could’ve been argued it was a healthy response to a growing economy.
However, the Trump tariff announcements on ‘liberation day’ changed this calculus, drastically. If we keep stacking tax cuts, tariffs, and new spending without a credible plan, we risk hitting a limit too. And when that happens, bond buyers won’t storm the Capitol—they’ll just ask for 6% instead of 4%. Or stop showing up altogether.
At that point, the fiscal playbook doesn’t get revised. It gets thrown out.
IV. This Is Happening Now
There’s a temptation to see bond market pressure as a slow-burn problem. Something that can be kicked down the road. But that would be a mistake—because this time, the can just kicked back.
This is happening now. In the first 100 days of the administration. Before any tax cuts have passed. Before a single dollar of new industrial or defense spending has hit the economy. And yet, the Trump administration is already shifting tone—now asking for a record $1 trillion defense budget.
The Truss government didn’t get a do-over. And while the U.S. has more tools than the UK, it also has far more exposure. If the bond market decides we’ve crossed a credibility line, the adjustment won’t be gradual. It’ll be sharp.
The kind of action we’re seeing in the Treasury market right now is unprecedented in our lifetimes.
Avoiding a crisis is still possible—but only if policy catches up to the moment. The bond market is no longer a passive observer, and this government must learn to steer through waters it no longer fully controls.
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For technical reasons this is less inflationary as well as being the backbone of a modern financial economy