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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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.
US
Donald Trump blames Volodymyr Zelenskyy for starting Ukraine war – a day after dozens killed in Russian missile strikes
Donald Trump has questioned Volodymyr Zelenskyy’s competence and suggested Ukraine started the war against Russia which is “20 times” its size.
The US president also said “millions of people are dead because of three people” – blaming Russian President Vladimir Putin, his White House predecessor Joe Biden, and Mr Zelenskyy, in that order.
It comes a day after 35 people, including two children, were killed by two Russian missiles that struck the northeastern city of Sumy as Ukrainians gathered to celebrate Palm Sunday in what was the deadliest strike on the country so far this year, according to officials.
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Damaged cars at the site of a Russian missile strike on Sumy. Pic: Reuters
Speaking in the White House’s Oval Office during a meeting with El Salvador’s President Nayib Bukele, Mr Trump told reporters: “If Biden were competent, and if Zelenskyy were competent, and I don’t know that he is…
“There was no way that war should never have been allowed to happen.”
He added: “Biden could have stopped it, and Zelenskyy could have stopped it, and Putin should have never started it.”
Asked about Mr Zelenskyy, Mr Trump said: “When you start a war you’ve got to know you can win the war.
“You don’t start a war against somebody that’s 20 times your size. And then hope that people give you some missiles.”
Mr Trump said he was the first to give Ukraine Javelin missiles.
Firefighters work at the site of a Russian missile strike in Sumy on Sunday. Pic: Reuters
“Millions of people are dead because of three people,” Mr Trump added.
“Let’s say Putin number one, let’s say Biden, who had no idea what the hell he was doing, number two, and Zelenskyy.
“And all I can do is try and stop it – that’s all I want to do. I want to stop the killing.
“And I think we’re doing well in that regard. I think you’ll have some very good proposals very soon.”
Mr Zelenskyy has called for a global response to the Sumy attack, in which more than 100 people were injured, saying the first strike hit university buildings while the second exploded above street level.
On Monday, Ukraine’s air force said a new Russian missile and guided bombs had targeted Sumy, but gave no indication of casualties or damage. Public broadcaster Suspilne reported an explosion in the city, with no further details.
‘It’s a horrible thing’
Asked about Sunday’s Sumy attack which is near the Russian border, Mr Trump earlier said on board Air Force One: “I think it was terrible and I was told they made a mistake, but I think it’s a horrible thing. I think the whole war is a horrible thing.”
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Russia ‘made a mistake’
When questioned about the incident, Kremlin spokesman Dmitry Peskov said Russia’s forces only strike military targets.
The strike targeted a gathering of senior military officers, according to the defence ministry in Moscow which accused Kyiv of using civilians as shields by holding military meetings in the city centre.
The ministry also claimed to have killed more than 60 troops. Russia did not provide any evidence to support its claims.
Polish foreign minister Radek Sikorski, whose country currently holds the EU’s presidency, said that recent attacks are “Russia’s mocking answer” to Kyiv’s agreement to a ceasefire proposed by the US administration over a month ago.
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Missile attack on Sumy
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The attack on Sumy followed a missile strike on 4 April on Mr Zelenskyy’s home city of Kryvyi Rih that killed some 20 people, including nine children.
Russia and Ukraine’s senior diplomats have accused each other of violating a tentative US-brokered deal to pause strikes on energy infrastructure.
Ukraine has endorsed a broader US ceasefire proposal, but Russia has effectively blocked it by imposing far-reaching conditions.
Mr Putin has said he wants Ukraine to drop its ambitions to join NATO, Russia to control the entirety of the four Ukrainian regions it has claimed as its own, and the size of the Ukrainian army to be limited. He has also made clear he wants Western sanctions eased.
US vice president JD Vance has said America and the UK are “working very hard” on a trade deal and he believes they will reach a “great agreement”.
Donald Trump imposed sweeping tariffs on imports to the United States several weeks ago, rocking the world economy, sending stock prices tumbling and sparking fears of a global recession.
Since then, Mr Trump has rowed back on those tariffs, reducing the rate paid on imports from most countries to 10% and, on Saturday, exempting electronics such as smartphones and laptops from the levy – including the 145% charge on imports from China.
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The UK was already going to face a blanket 10% duty before Mr Trump’s so-called “Liberation Day” announcement of worldwide tariff increases.
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The UK government has been hopeful of a deal to exempt the UK from Mr Trump’s tariffs, and in an interview with the website UnHerd on Tuesday, Mr Vance said he was optimistic that both sides could come to a mutually beneficial agreement.
“We’re certainly working very hard with Keir Starmer’s government,” Mr Vance said.
“The president really loves the United Kingdom. He loved the Queen. He admires and loves the King. It is a very important relationship. And he’s a businessman and has a number of important business relationships in [Britain]. But I think it’s much deeper than that.
“There’s a real cultural affinity. And, of course, fundamentally, America is an Anglo country.
“I think there’s a good chance that, yes, we’ll come to a great agreement that’s in the best interest of both countries.”
Mr Vance said the “reciprocal relationship” between the US and UK gives Britain a more advantageous position than other European countries when it comes to negotiating new trade arrangements, adding: “While we love the Germans, they are heavily dependent on exporting to the United States but are pretty tough on a lot of American businesses that would like to export into Germany.”
Chancellor Rachel Reeves will aim to continue negotiations for an economic deal with the US later this month when she travels to Washington to attend the International Monetary Fund’s spring meetings with other finance ministers.
UK Prime Minister Sir Keir Starmer, left, with Donald Trump, centre, and JD Vance in the Oval Office in February. Pic: Reuters
Vance criticises Europe on defence
During the interview, where he spoke on the phone from the West Wing of the White House, Mr Vance also touched on the apparent shift in the US and Europe’s security relationship.
He said: “The reality is – it’s blunt to say it, but it’s also true – that Europe’s entire security infrastructure, for my entire life, has been subsidised by the United States of America.”
Mr Vance said that as recently as a quarter-century ago Europe had “many vibrant militaries, at least militaries that could defend their own homelands”, but nowadays he believes “most European nations don’t have militaries that can provide for their reasonable defence”.
The vice president added: “The British are an obvious exception, the French are an obvious exception, the Poles are an obvious exception. But in some ways, they’re the exceptions that prove the rule, that European leaders have radically underinvested in security, and that has to change.”
Mr Vance said his message to Europe was the same one as that shared by then-French president General Charles de Gaulle during the height of the Cold War.
The US vice president said General de Gaulle “loved the United States of America, but (he) recognised what I certainly recognise, that it’s not in Europe’s interest, and it’s not in America’s interest, for Europe to be a permanent security vassal of the United States”.
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Mr Vance also suggested he believes a strong Europe would better for America.
“I don’t think that Europe being more independent is bad for the United States – it’s good for the United States. Just going back through history, I think – frankly – the British and the French were certainly right in their disagreements with Eisenhower about the Suez Canal,” he said.
Mr Vance added: “I think a lot of European nations were right about our invasion of Iraq. And frankly, if the Europeans had been a little more independent, and a little more willing to stand up, then maybe we could have saved the entire world from the strategic disaster that was the American-led invasion of Iraq.”
Asked about Mr Trump’s tariff regime and its impact on the stock market, Mr Vance said: “Any implementation of a new system is fundamentally going to make financial markets jittery.
“The president has been very consistent that this is a long-term play… Now, of course, you have to be responsive to what the business community is telling you, what workers are telling you, what bond markets are telling you. These are all variables that we have to be responsive to…. (to) make the policy successful”.
Donald Trump has suggested “homegrown criminals” in the US could be deported to jails in El Salvador – saying the US attorney general is “studying the laws right now”.
He made the comment while speaking alongside the Central American nation’s president, Nayib Bukele, in the White House.
The Trump administration has sent hundreds of alleged Venezuelan gang members to CECOT, a maximum security prison in El Salvador, since March.
When asked about the deportations – which were briefly blocked by a US court last month – Mr Trump said: “I’d like to go a step further.
“We also have homegrown criminals that push people into subways, hit elderly ladies on the back of the head when they’re not looking, that are absolute monsters.
“I’d like to include them in people to get out of the country.”
Pic: Reuters
When pressed on the matter by a reporter, he replied: “They’re as bad as anybody that comes in. We have bad ones too. I’m all for it.”
US Attorney General Pam Bondi, who was present at the meeting, is “studying the laws right now”, the US president added.
“If we can do that, that’s good,” he said. “I’m talking about violent people, really bad people.
“We can do things with the president [of El Salvador] for less money and have great security. He does a great job with that. We have other we’re negotiating with too.”
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The Trump administration has been deporting alleged Venezuelan gang members to the El Salvador jail since mid-March, when the US president signed the Alien Enemies Act.
The law from 1798 has been invoked just three times before, in wartime. It allows the president to detain and deport immigrants living in the US legally if they are from countries seen as “enemies” of the government.
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Lawyers and immigrant rights groups have been unable to contact the men sent to the 40,000 capacity CECOT prison – the largest detention facility in Latin America.
A judge issued a temporary block on the deportations on 17 March, but this was lifted by the Supreme Court last week.
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