The rise in bond yields combined with Mr. Trump’s spending spree could soon take the annual interest tab to US$1-trillion.Kent Nishimura/Reuters
You would think that U.S. President Donald Trump would know better. Here is a man who built his fortunes largely on real estate and such empires are not concocted with cash. They are financed by commercial mortgages and bonds are backed by them. In other words, Mr. Trump must be well aware of the risks of expensive debt, all the more so since a few of his properties went bankrupt.
Or does he?
He might have learned his lesson in April, when he launched a global tariff war that alarmed investors everywhere by sending seismic tremors through the US$29-trillion U.S. Treasuries market. The yields on 30-year notes shot above 5 per cent; they had spent the previous two months between 4.4 per cent and 4.8 per cent (bond prices and yields move in opposite directions).
Flustered, Mr. Trump hit the tariff pause button. Bond prices recovered. “The bond market is now beautiful,” he said after the yields dropped back to pretariff levels.
The bond market is no longer beautiful.
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Last week, his whiplash game surged back to life; this time, he vowed to hit the European Union with 50-per-cent tariffs. Bonds went into a tizzy and the yield on U.S. 10-year notes briefly went north of 4.6 per cent. True to form, Mr. Trump declared another tariff pause. He did not admit the market turmoil forced him to back down, though it almost certainly influenced his retreat (the Financial Times coined the term “TACO” – Trump Always Chickens Out – to describe the tariff reversals).
Yields came down, but not by much. By the end of this week, the 10-year note was trading at 4.4 per cent, up from 4.2 per cent a month ago. That of 30-year Treasuries once more reached 5 per cent before retreating slightly to 4.9 per cent.
What alarmed investors was that the U.S. dollar and bonds fell in tandem; usually, lower bond prices – that is, high yields – drive up a currency. When both fall at the same time, you know that investors are not merely shifting money from one U.S. asset class to another.
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The scenario says they are losing confidence in Mr. Trump’s MAGA crusade (whose tariffs, brought under emergency powers, were this week ruled unlawful by the U.S. Court of International Trade. A federal appeals court is temporarily leaving the tariffs in place.)
Investors in Treasuries are getting the message that Mr. Trump does not shy from playing with bond-market fire and that, like some previous presidents, notably George W. Bush and Joe Biden, he has little interest in fiscal rectitude. Moody’s said as much earlier this month, when it downgraded the U.S. credit rating by one notch. The agency cited increased federal spending and reduced government revenues from tax cuts for its decision.
The downgrade came as Mr. Trump’s “big, beautiful bill” came a step closer to being enacted into law. Bond investors see no beauty in the bill because it will blow out the federal deficit and debt loads. Analysts said the bill will increase borrowing by US$3-trillion to US$4-trillion over the next decade.
The debt trajectory is unsustainable at a time when bond yields are rising, boosting the cost of debt. According to the Peter G. Peterson Foundation, federal spending on interest payments reached US$881-billion in 2024, exceeding the defence and Medicaid budgets. The rise in bond yields – the cost of debt – combined with Mr. Trump’s spending spree could soon take the annual interest tab to US$1-trillion, equivalent to the gross domestic product of Saudi Arabia.
With bond yields high and the debt expanding like an out-of-control cancer, there will be a day of reckoning. There was with Liz Truss, the cursed British prime minister whose career ended after 50 days, in 2022, when the bond market reacted violently to her debut mini-budget’s unfunded tax cuts. “What I learned from my experience is the sheer power of the globalist economic establishment,” she wrote in a Washington Post column on May 22.
Of course, Mr. Trump would never resign – he will, unconstitutionally, seek a third term, some MAGA insiders say. The United States would never go bankrupt or even suffer a Greek-style debt crisis, since it is equipped with a strong economy and the world’s reserve currency. But the bond markets, as Ms. Truss learned the hard way, are not pussycats.
They are demanding and unforgiving and have the power to knock down Mr. Trump’s plans again and again, as they have twice already on the tariffs campaign. More damage to America’s credit rating could easily make a mockery of the MAGA economic agenda.
