Donald Trump has finally blinked – but it’s not the stock markets that have forced him to act
Chalk this one up to the bond vigilantes.
This is the term used periodically to describe investors who push back against what are perceived to be irresponsible fiscal or monetary policies by selling government bonds, in the process pushing up yields, or implied borrowing costs.
Most of the focus on markets in the wake of Donald Trump’s imposition of tariffs on the rest of the world has, in the last week, been about the calamitous stock market reaction.
This was previously something that was assumed to have been taken seriously by Mr Trump.
During his first term in the White House, the president took the strength of US equities – in particular the S&P 500 – as being a barometer of the success, or otherwise, of his administration.
Donald Trump in the Oval Office today. Pic: Reuters
He had, over the last week, brushed off the sour equity market reaction to his tariffs as being akin to “medicine” that had to be taken to rectify what he perceived as harmful trade imbalances around the world.
But, as ever, it is the bond markets that have forced Mr Trump to blink – and, make no mistake, blink is what he has done.
To begin with, following the imposition of his tariffs – which were justified by some cockamamie mathematics and a spurious equation complete with Greek characters – bond prices rose as equities sold off.
That was not unusual: big sell-offs in equities, such as those seen in 1987 and in 2008, tend to be accompanied by rallies in bonds.
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What it’s like on the New York stock exchange floor
However, this week has seen something altogether different, with equities continuing to crater and US government bonds following suit.
At the beginning of the week yields on 10-year US Treasury bonds, traditionally seen as the safest of safe haven investments, were at 4.00%.
By early yesterday, they had risen to 4.51%, a huge jump by the standards of most investors. This is important.
The 10-year yield helps determine the interest rate on a whole clutch of financial products important to ordinary Americans, including mortgages, car loans and credit card borrowing.
By pushing up the yield on such a security, the bond investors were doing their stuff. It is not over-egging things to say that this was something akin to what Liz Truss and Kwasi Kwarteng experienced when the latter unveiled his mini-budget in October 2022.
And, as with the aftermath to that event, the violent reaction in bonds was caused by forced selling.
Now part of the selling appears to have been down to investors concluding, probably rightly, that Mr Trump’s tariffs would inject a big dose of inflation into the US economy – and inflation is the enemy of all bond investors.
Part of it appears to be due to the fact the US Treasury had on Tuesday suffered the weakest demand in nearly 18 months for $58bn worth of three-year bonds that it was trying to sell.
But in this particular case, the selling appears to have been primarily due to investors, chiefly hedge funds, unwinding what are known as ‘basis trades’ – in simple terms a strategy used to profit from the difference between a bond priced at, say, $100 and a futures contract for that same bond priced at, say, $105.
In ordinary circumstances, a hedge fund might buy the bond at $100 and sell the futures contract at $105 and make a profit when the two prices converge, in what is normally a relatively risk-free trade.
So risk-free, in fact, that hedge funds will ‘leverage’ – or borrow heavily – themselves to maximise potential returns.
The sudden and violent fall in US Treasuries this week reflected the fact that hedge funds were having to close those trades by selling Treasuries.
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Trump freezes tariffs at 10% – except China
Confronted by a potential hike in borrowing costs for millions of American homeowners, consumers and businesses, the White House has decided to rein back its tariffs, rightly so.
It was immediately rewarded by a spectacular rally in equity markets – the Nasdaq enjoyed its second-best-ever day, and its best since 2001, while the S&P 500 enjoyed its third-best session since World War Two – and by a rally in US Treasuries.
The influential Wall Street investment bank Goldman Sachs immediately trimmed its forecast of the probability of a US recession this year from 65% to 45%.
Of course, Mr Trump will not admit he has blinked, claiming last night some investors had got “a little bit yippy, a little bit afraid”.
And it is perfectly possible that markets face more volatile days ahead: the spectre of Mr Trump’s tariffs being reinstated 90 days from now still looms and a full-blown trade war between the US and China is now raging.
But Mr Trump has blinked. The bond vigilantes have brought him to heel. This president, who by his aggressive use of emergency executive powers had appeared to be more powerful than any of his predecessors, will never seem quite so powerful again.
Donald Trump has agreed to send “top of the line weapons” to NATO to support Ukraine – and threatened Russia with “severe” tariffs if it doesn’t agree to end the war.
Speaking with NATO secretary-general Mark Rutte during a meeting at the White House, the US president said: “We’ve made a deal today where we are going to be sending them weapons, and they’re going to be paying for them.
“This is billions of dollars worth of military equipment which is going to be purchased from the United States, going to NATO, and that’s going to be quickly distributed to the battlefield.”
Pic: Reuters
Weapons being sent include surface-to-air Patriot missile systems and batteries, which Ukraine has asked for to defend itself from Russian air strikes.
Mr Trump also said he was “very unhappy” with Russia, and threatened “severe tariffs” of “about 100%” if there isn’t a deal to end the war in Ukraine within 50 days.
The White House added that the US would put “secondary sanctions” on countries that buy oil from Russia if an agreement was not reached.
Later on Monday, Ukrainian leader Volodymyr Zelenskyy thanked Mr Trump and said he was “grateful” for the US president’s “readiness to help protect our people’s lives”.
After criticising Vladimir Putin’s “desire to drag it out”, he said he appreciated “preparing a new decision on Patriots for Ukraine” – and added Kyiv is “working on major defence agreements with America”.
It comes after weeks of frustration from Mr Trump over Mr Putin’s refusal to agree to an end to the conflict, with the Russian leader telling the US president he would “not back down” from Moscow’s goals in Ukraine at the start of the month.
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Trump threatens Russia with ‘severe’ tariffs’
During the briefing on Monday, Mr Trump said he had held calls with Mr Putin where he would think “that was a nice phone call”, but then “missiles are launched into Kyiv or some other city, and that happens three or four times”.
“I don’t want to say he’s an assassin, but he’s a tough guy,” he added.
Earlier this year, Mr Trump told Mr Zelenskyy “you’re gambling with World War Three” in a fiery White House meeting, and suggested Ukraine started the war against Russia as he sought to negotiate an end to the conflict.
After Mr Trump’s briefing, Russian senator Konstantin Kosachev said on Telegram: “If this is all that Trump had in mind to say about Ukraine today, then all the steam has gone out.”
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Meanwhile, Mr Zelenskyy met with US special envoy Keith Kellogg in Kyiv, where they “discussed the path to peace” by “strengthening Ukraine’s air defence, joint production, and procurement of defence weapons in collaboration with Europe”.
He thanked both the envoy for the visit and Mr Trump “for the important signals of support and the positive decisions for both our countries”.
US
Trump is clearly fed up with Putin – but will his shift in tone force Russia to the negotiating table?
As ever, there is confusion and key questions are left unanswered, but Donald Trump’s announcement on Ukraine and Russia today remains hugely significant.
His shift in tone and policy on Ukraine is stark. And his shift in tone (and perhaps policy) on Russia is huge.
Ever since Mr Trump returned to the White House he has flatly refused to side with Ukraine over the Russian invasion.
He has variously blamed Ukraine for the invasion and blamed Joe Biden for the invasion, but has never been willing to accept that Russia is the aggressor and that Ukraine has a legitimate right to defend itself.
Today, all that changed. In a clear signal that he is fed up with Vladimir Putin and now fully recognises the need to help Ukraine defend itself, he announced the US will dramatically increase weapons supplies to Kyiv.
Pic: Reuters
But, in keeping with his transactional nature and in a reflection of the need to keep his isolationist “America-First” base on side, he has framed this policy shift as a multi-billion dollar “deal” in which America gains financially.
American weapons are to be “sold” to NATO partners in Europe who will then either transfer them to Ukraine or use them to bolster their own stockpiles as they transfer their own existing stocks to Kyiv.
“We’ve made a deal today,” the president said in the Oval Office. “We are going to be sending them weapons, and they are paying for them. We are manufacturing, they are going to be paying for it. Our meeting last month was very successful… these are wealthy nations.”
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What will Trump’s weapons deal mean for Ukraine?
This appears to be a clever framing of the “deal”. Firstly, America has always benefited financially by supplying weapons to Ukraine because much of the investment has been in American factories, American jobs and American supply chains.
While the details are not entirely clear, the difference now appears to be that the weapons would be bought by the Europeans or by NATO as an alliance.
The Americans are the biggest contributor to NATO, and so if the alliance is buying the weapons, America too will be paying, in part, for the weapons it is selling.
However, if the weapons are being bought by individual NATO members to replenish their own stocks, then it may be the case that the US is not paying.
NATO officials referred all questions on this issue to the White House, which has not yet provided clarity to Sky News.
It is also not yet clear what type of weapons will be made available and whether it will include offensive, as well defensive, munitions.
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Will Trump’s deal make a difference?
A key element of the package will likely be Patriot missile batteries, 10 to 15 of which are believed to be currently in Europe.
Under this deal, it is understood that some of them will be added to the six or so batteries believed to be presently in Ukraine. New ones would then be purchased from US manufacturers to backfill European stocks. A similar arrangement may be used for other weapons.
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The president also issued the Russian leader with an ultimatum, saying that Putin had 50 days to make a peace deal or else face 100% “secondary tariffs”. It’s thought this refers to a plan to tariff, or sanction, third countries that supply Russia with weapons and buy Russian oil.
This, the Americans hope, will force those countries to apply pressure on Russia.
But the 50-day kicking of the can down the road also gives Russia space to prevaricate. So, a few words of caution: first, the Russians are masters of prevarication. Second, Trump tends to let deadlines slip. And third, we all know Trump can flip-flop on his position repeatedly.
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‘Trump sides with the Ukrainian cause’
Maybe the most revealing aspect of all this came when a reporter asked Mr Trump: “How far are you willing to go if Putin sends more bombs in the coming days?”
“Don’t ask me questions like that…”
Mr Trump doesn’t really know what to do if Mr Putin continues to take him for a ride.
Mr Biden, before him, supplied Ukraine with the weapons to continue fighting.
If Mr Trump wants to end this, he may need to provide Ukraine with enough weapons to win.
But that would prolong, or even escalate, a war he wants to end now.
There’s the predicament.
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