Give the Bond Market Credit for the Tariff Blink

The bond market is remarkably persuasive when it gets cranky.

Yes, both stocks and bonds matter. When stocks climb, investors feel the “wealth effect” — richer on paper, so they book the vacation, upgrade the kitchen, and buy a second air fryer (because obviously, one isn’t enough).

But the bond market? It’s bigger. Much bigger. And when it speaks, policymakers listen.

Bond prices and yields move inversely. When bonds are sold off, yields rise — making borrowing more expensive. Mortgages, auto loans, and business credit lines all get pricier as yields jump.

U.S. Treasuries — government debt instruments — are supposed to be risk-free. After all, the world assumes the U.S. government pays its bills.

Typically, when markets panic, investors flee to safety — like Treasuries. Bond prices go up, yields go down. But when fear turns to full-blown capitulation, everything gets sold — even Treasuries — in a mad dash for cash.

We’ve seen it before:

• September 2008: After Lehman Brothers collapsed, the 10-year Treasury yield jumped from 3.47% to over 4% by Halloween.
• March 2020: When the pandemic was declared, the 10-year yield leapt from 0.76% to 1.18% in a single week.
  

And now?

Earlier this month, the bond market growled — and yields snapped higher. The 10-year U.S. Treasury yield spiked from 4.0% to 4.5% in about a week. Gold surged. The U.S. dollar sold off. And then — surprise! — on April 10, Trump paused his reciprocal tariffs for 90 days.

Forget the “Fed put” or “Trump put.” We think 4.5% is the new bond put — a warning line the market won’t cross without consequences.

Why the sell-off in Treasuries this time? Maybe China offloaded. Maybe over-leveraged bets got a margin call. Maybe investors just rushed to raise cash.

In 2009 and 2020, the Fed rode to the rescue. This time, their response is less predictable. With a dual mandate — maximum employment and price stability — the Fed is walking a tightrope. Inflation remains a threat. But so is corporate paralysis. Boardrooms are frozen and future planning is on hold.

Still, if Trump’s inflationary tariffs seriously stall economic growth, we expect the Fed to lean into its employment mandate. Rate cuts are likely — perhaps several — before year-end. Canada will probably follow.

Rate cuts won’t fix everything. But just like in 2009 and 2020, they’ll help support the stock market.

-written by Jeff Pollock