“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody,” said James Carville, campaign strategist for Bill Clinton’s 1992 campaign. More than 30 years after describing the power of the bond market, Carville is still a well-known political pundit. At the age of 80, he remains a vocal critic of Trump and his administration.
Market Reaction to Tariff Announcements
For four trading days after the announcement of massive reciprocal tariffs on almost every country in the world (apart from those staunch U.S. allies: Russia, North Korea, Iran, Belarus and Cuba), equity markets in the U.S. sank enough to push the Nasdaq, S&P 500 and Russell 2000 into bear market territory. Trump and members of his cabinet rationalized the negative wealth effect, almost US$10 trillion, with US$6 trillion from the S&P 500 alone. To put it another way: Washington was struggling while Trump held firm.
A Sudden Reversal
Then, out of the blue, Trump announced that the tariffs would be postponed by 90 days to give countries sufficient time to negotiate with the U.S. on appropriate tariff levels. In the meantime, the tariff rate for these countries would be set at 10 per cent. If crashing stock prices weren’t enough to force a change in policy, what was?
This is where Carville’s quote comes into play. Starting Monday of this week, the bond market began to weaken. Yields on U.S. Treasury bonds rose sharply from 4 per cent to nearly 4.4 per cent in just 48 hours. This is a significant move in a short time. It appeared that investors, mainly in Japan, were selling, forcing rates up and prices down.
As of the end of 2024, the U.S. had US$36.2 trillion in government debt (120 per cent of GDP). Of that, US$8.5 trillion is held by foreign countries. The top three are Japan at US$1 trillion, China at US$759 billion and the U.K. at US$723 billion. Even Canada holds US$379 billion. What happens if some of this debt isn’t rolled over at weekly auctions?
Rates would rise, and the U.S. dollar could drop even faster than it already is.
Economic Pressure on Households
It’s one thing for Trump and his cabinet to tell Americans they need to endure some pain, inflation and job losses, in order to balance trade and reshore manufacturing. It’s another to tell them their mortgage and car loan rates may also rise by 10 per cent or more at the same time.
As Carville said, the bond market can intimidate anyone, and in this case, it only took two days.
A Short-Lived Rebound?
When Trump adjusted his tariff policy and implementation dates, equity markets roared back, with the S&P rising almost 10 per cent on Wednesday. But before we claim the crisis has been averted, we need to consider the following:
- There is a global tariff of 10 per cent in effect, so prices will rise in the U.S.
- Even after 90 days, additional tariffs are likely.
- China responded aggressively with reciprocal tariffs of their own, and the U.S. has countered again, bringing its total to 125 per cent. At levels like this, trade between these two countries has been severely impacted.
- What happens to interest rates if countries continue to reduce their positions in U.S. government debt? Any change in U.S. Treasury yields feeds directly into all other lending rates in the U.S.—and, to some degree, in Canada.
- The original tariffs of 25 per cent on steel and aluminum are still in place.
- China, the EU, Canada and Mexico account for 60 per cent of all goods exported to the U.S. (almost US$2 trillion). This is where our focus needs to be in considering the long-term impact tariffs could have on the global economy.
As I write this (8 a.m. PT, April 10), equity markets almost everywhere are continuing to fall. Bond yields on U.S. Treasuries have fallen five basis points but are still up 35 bps from recent lows.
Given Trump’s volatile decision-making style, we could expect more reversals of previously non-negotiable positions.
Nicola Wealth’s Perspective
At Nicola Wealth, our position is as follows:
- Tariffs are both inflationary and disruptive to economic growth.
- U.S. equity markets were already trading at elevated valuations before these policies were introduced.
- In today’s environment, maintaining a well-diversified investment portfolio is more important than ever, particularly one where the majority of returns come from reliable cash flow sources such as rental income, interest, and dividends.
By focusing on income-generating assets and long-term diversification, we aim to position our portfolios to better navigate uncertainty rather than reacting to short-term market pressures, including movements in the bond market.
Disclaimer
This material contains the current opinions of the author, and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer, and Investment Fund Manager with the required securities commissions.
